<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:80354.wais]
SOCIAL SECURITY: THE LONG-TERM BUDGET IMPLICATIONS
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, JUNE 19, 2002
__________
Serial No. 107-32
__________
Printed for the use of the Committee on the Budget
Available on the Internet: http://www.access.gpo.gov/congress/house/
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COMMITTEE ON THE BUDGET
JIM NUSSLE, Iowa, Chairman
JOHN E. SUNUNU, New Hampshire JOHN M. SPRATT, Jr., South
Vice Chairman Carolina,
PETER HOEKSTRA, Michigan Ranking Minority Member
Vice Chairman JIM McDERMOTT, Washington
CHARLES F. BASS, New Hampshire BENNIE G. THOMPSON, Mississippi
GIL GUTKNECHT, Minnesota KEN BENTSEN, Texas
VAN HILLEARY, Tennessee JIM DAVIS, Florida
MAC THORNBERRY, Texas EVA M. CLAYTON, North Carolina
JIM RYUN, Kansas DAVID E. PRICE, North Carolina
MAC COLLINS, Georgia GERALD D. KLECZKA, Wisconsin
GARY G. MILLER, California BOB CLEMENT, Tennessee
PAT TOOMEY, Pennsylvania JAMES P. MORAN, Virginia
WES WATKINS, Oklahoma DARLENE HOOLEY, Oregon
DOC HASTINGS, Washington TAMMY BALDWIN, Wisconsin
JOHN T. DOOLITTLE, California CAROLYN McCARTHY, New York
ROB PORTMAN, Ohio DENNIS MOORE, Kansas
RAY LaHOOD, Illinois MICHAEL E. CAPUANO, Massachusetts
KAY GRANGER, Texas MICHAEL M. HONDA, California
EDWARD SCHROCK, Virginia JOSEPH M. HOEFFEL III,
JOHN CULBERSON, Texas Pennsylvania
HENRY E. BROWN, Jr., South Carolina RUSH D. HOLT, New Jersey
ANDER CRENSHAW, Florida JIM MATHESON, Utah
ADAM PUTNAM, Florida
MARK KIRK, Illinois
[Vacant]
Professional Staff
Rich Meade, Chief of Staff
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, June 19, 2002.................... 1
Statement of:
Hon. David M. Walker, Comptroller General, U.S. General
Accounting Office.......................................... 3
C. Eugene Steuerle, Senior Fellow, the Urban Institute;
former Chair, Social Security Technical Panel on Methods
and Assumptions; President, National Tax Association....... 40
Maya C. MacGuineas, Senior Fellow, New America Foundation.... 51
Hon. Barbara B. Kennelly, President and CEO, National
Committee to Preserve Social Security and Medicare; former
Member of Congress......................................... 56
Dan L. Crippen, Director, Congressional Budget Office........ 74
Prepared statement, additional submissions of:
Mr. Walker:
Prepared statement....................................... 6
GAO's calculated rate of return on trust fund assets..... 20
Present excess value of the OASDI program................ 21
Mr. Steuerle................................................. 43
Ms. MacGuineas............................................... 54
Ms. Kennelly................................................. 58
Mr. Crippen.................................................. 75
SOCIAL SECURITY: THE LONG-TERM BUDGET IMPLICATIONS
----------
WEDNESDAY, JUNE 19, 2002
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to call, at 10:25 a.m. in room
210, Cannon House Office Building, Hon. Jim Nussle (chairman of
the committee) presiding.
Members present: Representatives Nussle, Gutknecht, Toomey,
Hastings, Brown, Crenshaw, Spratt, Bentsen, Price, Moran, and
Hooley.
Chairman Nussle. Good morning, and welcome. We have a
number of guests joining us as well. We are pleased to have you
with us today for our committee's hearing on Social Security
and the budget implications of long-term sustainability.
First of all, I would like to compliment Mr. Spratt for his
suggestion, last year now, that we hold this hearing. We have
obviously had many things to touch on and focus on since he
made that suggestion after the budget went through last year.
Certainly, September changed everyone's focus and there were
many immediate necessary issues that we had to deal with.
That may be a good segue or threshold for this hearing
today. The necessary and the immediate and the emergency and
the things that focus our attention on a minute-to-minute, day-
to-day, election year to election year basis, oftentimes are
the only things that occupy Congress' attention.
Today, I am pleased to focus the committee's attention on
Social Security. Social Security is our Nation's most
successful antipoverty program. It benefits more than 44
million Americans and its preservation is a responsibility that
neither I nor any of my colleagues take lightly.
Members may recall that this hearing was originally
scheduled for last September 13; then, of course, 2 days before
the hearing our world changed. As a result of terrorist
attacks, we significantly altered our perceptions about our own
personal security. Still I know that today our colleagues--and
myself for that matter--are determined not to let the events of
that very important and fateful day derail our obligation to
ensure that retirement security is available not only for this
generation, but future generations.
Although the Budget Committee has no specific legislative
jurisdiction over Social Security itself and the program--or,
for that matter, any changes to the program--we must deal with
the consequences of any reform plan or any plan to change or
alter or deal with Social Security as well as--maybe more
importantly--the consequences of failing to act. It is
absolutely critical that Budget Committee members and the
general public understand the budget implications of Social
Security's long-term sustainability before proceeding to a
debate on potential solutions.
We have today a host of high caliber witnesses who have
given us a number of good ideas in the past; and certainly,
first and foremost in that regard is David Walker. I don't know
if there is anyone who has more consistently sounded the alarm
about the impending concern over a number of long-term
obligations to our Federal Government, Social Security being
one of them--many obligations that he has highlighted for
coming in a siren sort of way. We appreciate his continued
vigilance to bring that to our attention. I told him before the
hearing today--he really gets to showcase that.
Oftentimes in the past, he has had to deal with that along
with 10 or 20 other issues that he has brought to our
attention. Today we get to focus the way we wanted to last
September 13.
Dealing with the problem and focusing on the consequences
does not have to be political. You know, I have heard all sorts
of tactics used on many people's parts: privatization, scaring
people, doing all sorts of things. It is scary, but it is not a
matter of the reform being scary; it is a matter of the
consequences of inaction being quite frightening, particularly
taken in context with what Mr. Walker and others will be
presenting today.
So I look forward to the opportunity to somberly take a
look at that issue. Fortunately, we don't have the
collegialities that people can use that as a way to forward
anybody's particular political agenda; we can just look at this
in the careful context that I think it deserves, particularly
given all of the priorities that Congress has to deal with.
Again, I would like to compliment Mr. Spratt for his
specific suggestion and all members who have chimed in on
needing to focus on this issue. And I would recognize him for
any comments he would like to make at this time.
Mr. Spratt. Thank you, Mr. Chairman. It is hard to believe
that 18 months ago we had within our reach the first phase at
least of a plan that would have helped us save, salvage Social
Security. That plan had bipartisan support.
The first phase of it was that we would dedicate the
surpluses building up in the Social Security trust fund solely
to the repurchase of outstanding Treasury bonds and notes, and
thereby add about $3.5 trillion to the national savings, and at
the same time, retire most of the debt held by the public.
We also had a projected surplus of $5.6 billion, which was
enough, if we husbanded our resources and budgeted right, to
allocate some share, some portion, to shore up the long-term
liabilities of Social Security.
Congress took another tack, preferring tax cuts. We then
found that we were in the midst of a recession, and we then
found ourselves challenged by terrorists. So the fiscal facts
have changed dramatically. We hardly have the money to buy up
any of the public debt now, much less allocate some share of
the general fund to subsidizing and shoring up Social Security.
But that doesn't mean that the problem has gone away. Far
from it. As we meet, 77 million baby boomers are marching to
their retirement. There is no way that we can change that fact;
we have got to face it. This hearing highlights that critical
fact and reminds us that neither we in Congress, nor the Bush
administration, has yet to address the biggest fiscal challenge
that faces us all. So I think it is timely and pertinent.
Regardless of our jurisdiction I think we should be leading
the way here, Mr. Chairman. I appreciate your calling this
hearing.
Chairman Nussle. I thank the gentleman.
As I said to start with, there is no one who has in an
objective, sober, somber, responsible way provided any better
information to the United States Congress on this issue than
David Walker, who is the Comptroller General for the United
States and, of course, oversees GAO.
We appreciate your coming today with your presentation. We
look forward to it, and you may proceed as you see fit.
Welcome.
STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED
STATES
Mr. Walker. Thank you, Mr. Chairman, Mr. Spratt, other
members of this committee. It is a pleasure to be back before
you today to talk about our Nation's Social Security program
and the long-range challenges relating thereto.
I should note at the outset that while I may have been
talking about this problem for a while--not only Social
Security and how it fits into our long-range fiscal challenge--
CBO Director Dan Crippen shares my concerns, and I know that he
is going to be testifying later today.
We are two lone voices in the wilderness, and I am very
appreciative of your willingness, Mr. Chairman and Mr. Spratt,
to conduct this hearing, because this has to be part of a
broader public education effort in order to help the public
understand the nature, extent and the timing of our problems
such that Congress will then be in a position to act.
Because Congress will eventually be required to act, as I
will point out, the sooner the better for a variety of reasons.
I have a few graphics that I would like to use today to be
able to convey a number of important messages, if we can start
with the first one.
My first point would be that Social Security reform is part
of a larger and very significant fiscal and economic challenge;
and to make that point, I am going show two graphics. The first
one is how the composition of the Federal budget has changed
over the last 40 years. You can see that in 1962, when John F.
Kennedy was President, 68 percent of the Federal budget was
discretionary. The Congress was able to decide how that was
going to be spent every year.
By 1982, that had declined to 44 percent. And in the fiscal
2002 budget, it was down to 37 percent. So the ratio has
flipped during the prior 40 years.
Specifically, Congress used to be able to decide annually
how $2 out of every $3 were spent. Now it is only a little more
than $1 out of $3. This is going to get worse as we go forward,
because much of the budget is on autopilot unless Congress and
the President take certain actions.
In the second graphic is our famous ``haircut, scalp and
decapitation chart.'' I realize these labels aren't pleasant,
but one can see how you get them from here. This shows results
of our latest long-range budget simulation for which,
importantly, we take the Social Security and Medicare trustees'
best estimate, or intermediate assumptions, and we take CBO's
assumptions; we don't want to compete with our sister agency--
they come up with the economic assumptions--or with the
trustees.
If you start with these and the percentage of our economy
represented by Federal taxes, and if you assume the tax cuts
enacted last year do not sunset, that spending will end up
increasing based upon the Social Security and Medicare
trustees' intermediate estimates; and that discretionary
spending grows by the rate of the economy--this is what the
future will look like.
If you look at the spending side by 2015, we will start
having to haircut all other spending. By 2030, it will have to
be cut significantly. By 2050, the entire Federal budget would
have to be cut in half.
Now, obviously, there are alternatives. You can raise
taxes, cut spending, go further into debt, or some combination
thereof. But if you look at the relative order of magnitude,
there is a huge long-range fiscal imbalance driven primarily by
two things. No. 1, known demographic trends--as you mentioned,
Mr. Chairman, the retirement of the baby boom generation--and
No. 2, rising health care costs.
We are not going to change known demographic trends and not
much has been done lately to help control rising health care
costs. In fact, some steps will end up fueling these health
care costs.
Second key point: Focusing on trust fund solvency alone is
not sufficient. We need to put the program on a path toward
sustainable solvency. Next graphic, please.
This graphic shows the cash flows for the OASDI combined
program, Social Security, Old Age, Survivors Income and
Disability Insurance program. This is the combined cash flow.
Yes, we have positive cash flows now, but we are going to start
going into negative cash flow position starting in 2017. And
starting in about 2006, these positive cash flows start going
down.
Now, what does that mean? That means that to the extent
that you have had this positive cash flow that has provided
some additional budget flexibility in the integrated budget,
that is going to start going down in about 2006. That is not
far from now. By 2017, you are going to turn a negative cash
flow, which is going to be even more of a problem, because you
are going to have to figure out how you are going to pay those
benefits: raise taxes, cut spending or increase debt held by
the public. And it gets progressively worse as time goes on.
So cash flow is key. Solvency is only one factor.
The next key point is that solving Social Security's long-
range financing problem is more important and complex than
simply making the numbers add up. This program, meaning OASDI,
is critically important to the economic security of millions of
Americans, not only in retirement but also for the disabled and
others.
Given the current financial shortfall in the program, it is
important to compare proposals both to current promised and to
funded benefits. If you can go back, please, to the last one.
There are a lot of people that want to compare Social Security
reform proposals just to promised benefits. That is
fundamentally flawed and unfair, because all the promised
benefits are not funded.
There is a huge shortfall between what has been promised
and what has been funded; and you have to figure out how you
are going to close that shortfall. So any analysis, including
the ones that were released yesterday that compare the benefit
cuts based solely upon promised benefits, rather than to both
funded and promised, is unfair, unbalanced--in my opinion,
inappropriate.
Therefore, when GAO does work, which you will see in a few
minutes, we compare it to both funded and promised benefits.
Both are relevant. Using only one or the other is not
appropriate; you need to look at both. And you need to
determine how to close that gap.
Reform proposals should be evaluated as packages. We are
going to have to engage in some heavy lifting. We are going to
have to make some trade-offs. There is no free lunch. And, as a
result, if you look at things piecemeal--retirement age,
indexing, bend points, even individual accounts, if you look at
elements one at a time, you are going to polarize the
situation. Therefore, there is a need to look at packages and
to compare them against some criteria.
And, Mr. Chairman, as you know, GAO has come up with some
recommended criteria, and these are the three at the highest
level. But there are a bunch of sub-criteria that we would
recommend Congress use to evaluate Social Security reform
proposals as a package.
Next, please. Acting sooner rather than later helps ease
the difficulty of change. This graphic shows the degree of the
imbalance for these periods of time. You can see that the
sooner you act, then the less dramatic either the benefit
adjustment is going to have to be, or the tax adjustment, or
some combination is going to have to be in order to make the
numbers work, because of the miracle of compounding.
Therefore, we need to be able to recognize that the longer
we wait, not only the more dramatic the changes will have to
be, but the more difficult they will be to make because you
will have more people who are already receiving benefits; they
will represent a larger percentage of the population, and
therefore, it will be more difficult to be able to make needed
changes in some regards.
Last point before I summarize: We believe, Mr. Chairman,
that it is possible to structure Social Security reform such
that you can exceed the expectations of all generations of
Americans.
Let me restate that: You have the ability to exceed the
expectations of every generation of Americans.
And why do I say that? Because from a practical standpoint,
current retirees and people who are near retirement are afraid
that Congress is going to cut their benefits. And they don't
have the time or ability to make up for any such cut because
they are already retired or they are near retirement. From a
practical standpoint, that is not going to be politically
possible nor would it be fair to do that.
Secondly, baby boomers like myself are already discounting
Social Security. They are discounting it more than they should,
as to what they think that they are going to get. And
generation Xers and Ys, like my kids, are discounting it even
more.
Therefore, if you structure a Social Security reform
proposal that leaves retirees and people who are nearing
retirement alone, keeps them whole, deliver on the promise, if
you restructure Social Security reform such that you make
gradual changes that have gradually greater effects to younger
people, but gives them time to be able to adjust, you can
exceed the expectations of all generations of Americans. I call
that a win.
What it takes is political leadership and personal
courage--political leadership and personal courage.
The last word that I will give you is, this is easy lifting
compared to Medicare and health care. This is nothing compared
to the challenges that we face in Medicare and health care.
There is going to be a lot of pain, and the magnitude of change
in the health care area is going to have to be much greater. So
all of the more reason, why don't we get on with something that
can be a win-win scenario?
Thank you.
[The prepared statement of Mr. Walker follows:]
Prepared Statement of David M. Walker, Comptroller General, U.S.
General Accounting Office
Mr. Chairman and members of the committee, thank you for inviting
me here to discuss ensuring the long-term viability of our Nation's
Social Security program. Social Security not only represents the
foundation of our retirement income system; it also provides millions
of Americans with disability insurance and survivor's benefits. As a
result, Social Security provides benefits that are critical to the
current and future well-being of tens of millions of Americans.
However, as I have said in congressional testimonies over the past
several years,\1\ the system faces both solvency and sustainability
challenges in the longer term. Although the Social Security Trustees
now project that under the intermediate or ``best estimate''
assumptions the combined Social Security trust funds\2\ will be
exhausted 3 years later than in last year's estimates, the magnitude of
the long-term funding shortfall is virtually unchanged. In their 2002
report, the Trustees emphasized that while the program's near-term
financial condition has improved slightly, Social Security faces a
substantial financial challenge in the not-too-distant future that
needs to be addressed soon. In essence, the program's long-term outlook
remains unchanged. Without reform, Social Security, Medicare, and
Medicaid are unsustainable, and the long-term impact of these
entitlement programs on the Federal budget and the economy will be
dramatic.
Over the past few years, a wide array of proposals has been put
forth to restore Social Security's long-term solvency, and last
December a commission appointed by the President presented three models
for modifying the current program. The Commission's final report\3\
called for a period of discussion lasting at least a year before
legislative action is taken to strengthen and restore sustainability to
Social Security. It is not my intention to discuss the specifics of or
take a position for or against any individual reform proposal, element,
or approach. Rather, I hope my testimony today, which is based on a
body of work we have published over the past several years, will help
clarify some of the key issues in the debate. To do that, I'm going to
talk about the nature and timing of the Social Security problem and a
framework you might use in addressing it.
First, let me highlight a number of important points in connection
with our Social Security challenge:
<bullet> Social Security reform is part of a larger and
significant fiscal and economic challenge. If you look ahead in the
Federal budget, the combined Social Security or Old-Age and Survivors
Insurance and Disability Insurance (OASDI) program together with the
rapidly growing health programs (Medicare and Medicaid) will dominate
the Federal Government's future fiscal outlook. Under GAO's long-term
simulations it continues to be the case that these programs
increasingly constrain Federal budgetary flexibility over the next few
decades. Absent reform, the Nation will ultimately have to choose
between persistent, escalating Federal deficits, significant tax
increases and/or dramatic budget cuts.
<bullet> Focusing on trust fund solvency alone is not sufficient.
We need to put the program on a path toward sustainable solvency. Trust
fund solvency is an important concept, but it is not the only
perspective we need to have on Social Security's long-term financing.
In fact, focusing on trust fund solvency alone is inappropriate and can
lead to a false sense of security about the overall condition of the
Social Security program. The size of the trust fund does not tell us
whether the program is sustainable-that is, whether the government will
have the capacity to pay future claims or what else will have to be
squeezed to pay those claims. Aiming for sustainable solvency would
increase the chance that future policymakers would not have to face
these difficult questions on a recurring basis. Estimates of what it
would take to achieve 75-year trust fund solvency understate the extent
of the problem because the program's financial imbalance gets worse in
the 76th and subsequent years.
<bullet> Solving Social Security's long-term financing problem is
more important and complex than simply making the numbers add up.
Social Security is an important and successful social program that
affects virtually every American family. It currently pays benefits to
more than 45 million people, including retired workers, disabled
workers, the spouses and children of retired and disabled workers, and
the survivors of deceased workers. The number of individuals receiving
benefits is expected to grow to almost 69 million by 2020. The program
has been highly effective at reducing the incidence of poverty among
the elderly, and the disability and survivor benefits have been
critical to the financial well-being of millions of others.
<bullet> Given the current financial shortfall of the program, it
is important to compare proposals to both current promised and funded
benefits. Comparing the beneficiary impact of reform proposals solely
to current Social Security promised benefits is inappropriate since all
current promised benefits are not funded over the longer term. As a
result, comparisons to current promised benefits after the point of
trust fund insolvency assume a payroll tax increase or general revenue
infusion that have not been enacted and may not occur. Likewise,
comparisons of reform proposals solely to funded benefits after the
point of trust fund insolvency are also inappropriate since that
assumes a reduction in benefits that has not been enacted and may not
occur. The key point is that there is a significant gap between
promised and funded benefits that must be closed. In fact, a primary
purpose of most Social Security reform proposals is to close or
eliminate this gap.
<bullet> Reform proposals should be evaluated as packages. The
elements of any package interact; every package will have pluses and
minuses, and no plan will satisfy everyone on all dimensions. If we
focus on the pros and cons of each element of reform, it may prove
impossible to build the bridges necessary to achieve consensus.
<bullet> Acting sooner rather than later helps to ease the
difficulty of change. As I noted previously, the challenge of facing
the imminent and daunting budget pressure from Medicare, Medicaid, and
OASDI increases over time. Social Security will begin to constrain the
budget long before the trust funds are exhausted. The program's annual
cash surplus will enter a steady decline beginning in 2006,\4\ and from
2017 on, Social Security's annual cash deficit will place increasing
pressure on the rest of the budget to raise the resources necessary to
meet the program's costs. Waiting until Social Security faces an
immediate solvency crisis will limit the scope of feasible solutions
and could reduce the options field to only those choices that are the
most difficult and could also delay the really tough decisions on
Medicare and Medicaid. Acting sooner rather than later would allow
changes to be phased in so that future and near retirees have time to
adjust their retirement planning.
<bullet> We believe it is possible to structure a Social Security
reform proposal that will exceed the expectations of all generations of
Americans. Today many retirees and near-retirees fear cuts will affect
them while young people believe they will get little or no Social
Security benefits. We believe the time has come to craft a solution
that will protect Social Security benefits for the Nation's current and
near-term retirees, while ensuring that the system will be there for
future generations.
Our Social Security challenge is more urgent than it may appear.
Although the combined trust funds will not run dry until 2041, the
Social Security program's pressure and cash demands on the rest of the
Federal Government will begin much sooner. Failure to take remedial
action will, in combination with other entitlement spending, place
unsustainable pressure on the government and, ultimately, the economy.
This problem is about more than finances. It is also about maintaining
an adequate safety net for American workers against loss of income from
retirement, disability, or death; Social Security provides a foundation
of retirement income for millions of Americans, and has prevented many
former workers from living their retirement years in poverty. As the
Congress considers proposals to restore the long-term financial
stability and viability of the Social Security system, it also needs to
consider the impact of the potential changes on different types of
beneficiaries. Moreover, while addressing Social Security reform is
important and will not be easy, Medicare presents a much greater, more
complex, and more urgent fiscal challenge.
To assist the Congress in its deliberations, GAO has developed
criteria for evaluating Social Security reform proposals. These
criteria aim to balance financial and economic considerations with
benefit adequacy and equity issues and the administrative challenges
associated with various proposals. The use of these criteria can help
facilitate fair consideration and informed debate of Social Security
reform proposals. Although making policy decisions of this importance
requires appropriate deliberation, the time to act is now. Waiting only
makes the problem larger, the magnitude of the required changes
greater, and the time available to phase in changes shorter. Waiting
also may serve to further delay the really hard decisions on Medicare
and Medicaid.
Social Security's Long-Term Financing Problem Is More Urgent Than May
Appear
Today, the Social Security program does not face an immediate
crisis but rather a long-range and more fundamental financing problem
driven largely by known demographic trends. The lack of an immediate
solvency crisis affects the nature of the challenge, but it does not
eliminate the need for action. Acting soon reduces the likelihood that
the Congress will have to choose between imposing severe benefit cuts
and unfairly burdening future generations with the program's rising
costs. Acting soon would allow changes to be phased in so the
individuals who are most likely to be affected, namely younger and
future workers, will have time to adjust their retirement planning
while helping to avoid related ``expectation gaps.'' Mr. Chairman, as
you heard earlier this month while hosting the Second Annual OECD
International Conference of Chairpersons of Parliamentary Budget
Committees, we are not alone in facing long-term budget challenges due
to an aging population. Our counterparts in many European countries are
debating these same issues, and a number of developed and developing
countries have already engaged in fundamental reform of their systems
to deal with their long-range challenges.
Acting soon will also help put the overall Federal budget on a more
sustainable footing over the long term, thereby promoting both higher
economic growth and more fiscal flexibility. The importance of such
flexibility was brought dramatically home last September. The budgetary
surpluses of recent years put us in a stronger position to respond both
to the events of September 11 and to the economic slowdown than would
otherwise have been the case. Going forward, the Nation's commitment to
surpluses will truly be tested. None of the changes since September 11
have lessened the pressures placed by Social Security, Medicare, and
Medicaid on the long-term fiscal outlook. Indeed, the events of
September 11 have served to increase our long-range fiscal challenges.
Since there is a great deal of confusion about Social Security's
current financing arrangements and the nature of its long-term
financing problem, I would like to spend some time describing the
nature, timing, and extent of the financing problem.
Demographic Trends Drive Social Security's Long-Term Financing Problem
As you all know, Social Security has always been largely a pay-as-
you-go system. This means that current workers' taxes pay current
retirees' benefits. As a result, the relative numbers of workers and
beneficiaries has a major impact on the program's financial condition.
This ratio, however, is changing. In the 1960s, the ratio averaged
4.2:1. Today it is 3.4:1 and it is expected to drop to around 2:1 by
2030. The retirement of the baby boom generation is not the only
demographic challenge facing the system. People are retiring early and
living longer. A falling fertility rate is the other principal factor
underlying the growth in the elderly's share of the population. In the
1960s, the fertility rate was an average of three children per woman.
Today it is a little over two, and by 2030 it is expected to fall to
1.95, a rate that is below replacement. Taken together, these trends
threaten the financial solvency and sustainability of this important
program (See fig. 1).
The combination of these trends means that labor force growth will
begin to slow after 2010 and become negligible by 2050 (See fig. 2).
Relatively fewer workers will be available to produce the goods and
services that all will consume. Without a major increase in
productivity, low labor force growth will lead to slower growth in the
economy and to slower growth of Federal revenues. This in turn will
only accentuate the overall pressure on the Federal budget.
This slowing labor force growth is not always considered as part of
the Social Security debate. Social Security's retirement eligibility
dates are often the subject of discussion and debate and can have a
direct effect on both labor force growth and the condition of the
Social Security retirement program. However, it is also appropriate to
consider whether and how changes in pension and/or other government
policies could encourage longer workforce participation. To the extent
that people choose to work longer as they live longer, the increase in
the share of life spent in retirement would be slowed. This could
improve the finances of Social Security and mitigate the expected
slowdown in labor force growth.
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In addition to encouraging people to work longer, a second approach
to addressing labor force growth would be to bring more people into the
labor force. In domestic social policy, we have seen an increasing
focus on encouraging those previously outside the labor force (i.e.,
welfare recipients, the disabled) into the workforce. Concern about the
slowdown in the growth of the labor force may also lead to discussions
about immigration and its role. Increased immigration, however, poses
complex issues and is unlikely to be the sole solution. For example,
according to a recent United Nations study,\5\ it would take more than
a sustained tenfold increase in projected immigration to maintain the
ratio of workers to retirees at recent levels. These are issues that
the Congress may wish to explore further in the next few years.
Because of the demographic trends discussed above, current
estimates show that within 15 years benefit payments will begin to
exceed program revenue, which is composed largely of payroll taxes on
current workers\6\ (See fig. 3).
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social security trust funds, cash flow, and the federal budget
Within the Federal budget, Social Security--more properly, the Old-
Age and Survivors Insurance and Disability Insurance programs (OASDI)--
has two trust funds that authorize Treasury to pay benefits as long as
the applicable trust fund has a positive balance. Currently, annual tax
revenues to Social Security exceed annual benefit payments. The trust
funds, by law, invest the resulting cash surplus in U.S. Government
obligations or securities that are backed by the full faith and credit
of the U.S. Government. At present, the trust funds' assets are in the
form of special, nonmarketable Treasury securities that are backed by
the full faith and credit of the U.S. Government and so carry no risk
of default.\7\ Although the trust funds cannot sell their holdings in
the open market, the trust funds face no liquidity risk since they can
redeem their special Treasury securities before maturity without
penalty. These securities earn interest credits at a statutory rate
linked to market yields, and this interest from the Treasury is
credited to the trust funds in the form of additional Treasury
securities.
I think it is useful to pause for a moment here and reflect on what
the term ``trust fund'' means in the Federal budget.\8\ Trust funds in
the Federal budget are not like private trust funds. An individual can
create a private trust fund using his or her own assets to benefit a
stated individual(s). The creator, or settler of the trust, names a
trustee who has a fiduciary responsibility to manage the designated
assets in accordance with the stipulations of the trust. In contrast,
Federal trust funds are budget accounts used to record receipts and
expenditures earmarked for specific purposes. The Congress creates a
Federal trust fund in law and designates a funding source to benefit
stated groups or individuals. Unlike most private trustees, the Federal
Government can raise or lower future trust fund collections and
payments or change the purposes for which the collections are used by
changing existing laws. Moreover, the Federal Government has custody
and control of the funds.
Under current law, when the Social Security trust funds' tax
receipts exceed costs--that is, when the trust funds have an annual
cash surplus--this surplus is invested in Treasury securities and can
be used to meet current cash needs of the government or to reduce debt
held by the public. In either case, the solvency of the trust funds is
unchanged. However, while the Treasury securities are an asset to the
trust funds, they are a liability to the Treasury. Any increase in
assets to the trust funds creates an increase of equal size in future
claims on the Treasury. One government fund is lending to another. As a
result, these transactions net out on the government's consolidated
books.\9\
The accumulated balances in a trust fund do not in and of
themselves increase the government's ability to meet the related
program commitments. That is, simply increasing trust fund balances
does not improve program sustainability. Increases in trust fund
balances can strengthen the ability to pay future benefits if a trust
fund's cash surpluses are used to improve the government's overall
fiscal position. For example, when a trust fund's cash surpluses are
used to reduce debt held by the public, this increases national saving,
contributes to higher economic growth over the long term, and enhances
the government's ability to raise cash in the future to pay benefits.
It also reduces Federal interest costs below what they otherwise would
have been, thereby promoting greater fiscal flexibility in the future.
According to the Trustees' intermediate estimates, the combined
Social Security trust funds will be solvent until 2041.\10\ However,
our long-term model shows that well before that time program spending
will constitute a rapidly growing share of the budget and the economy.
Ultimately, the critical question is not how much a trust fund has in
assets, but whether the government as a whole can afford the promised
benefits in the future and at what cost to other claims on scarce
resources. As I have said before, the future sustainability of programs
is the key issue policymakers should address--i.e., the capacity of the
economy and budget to afford the commitment. Fund solvency can help,
but only if promoting solvency improves the future sustainability of
the program.
social security's cash flow is expected to turn negative in 2017
Today, the Social Security trust funds take in more in taxes than
they spend. Largely because of the known demographic trends I have
described, this situation will change. Under the Trustees' intermediate
assumptions, annual cash surpluses begin to shrink in 2006, and
combined program outlays begin to exceed dedicated tax receipts in
2017, a year after Medicare's Hospital Insurance trust fund (HI)
outlays are first expected to exceed program tax revenues. At that
time, both programs will become net claimants on the rest of the
Federal budget (See fig. 4).
As I noted above, the special Treasury securities represent assets
for the trust funds but are future claims against the Treasury.
Beginning in 2017, the trust funds will begin drawing on the Treasury
to cover the cash shortfall, first relying on interest income and
eventually drawing down accumulated trust fund assets. Regardless of
whether the trust funds are drawing on interest income or principal to
make benefit payments, the Treasury will need to obtain cash for those
redeemed securities either through increased taxes, spending cuts,
increased borrowing from the public, or correspondingly less debt
reduction than would have been the case had Social Security's cash flow
remained positive.\11\ Neither the decline in the cash surpluses nor
the cash deficit will affect the payment of benefits. However, the
shift affects the rest of the budget. The negative cash flow will place
increased pressure on the Federal budget to raise the resources
necessary to meet the program's ongoing costs.
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decline in budgetary flexibility will be severely exacerbated absent
entitlement reform
From the perspective of the Federal budget and the economy, the
challenge posed by the growth in Social Security spending becomes even
more significant in combination with the more rapid expected growth in
Medicare and Medicaid spending. This growth in spending on Federal
entitlements for retirees will become increasingly unsustainable over
the longer term, compounding an ongoing decline in budgetary
flexibility. Over the past few decades, spending on mandatory programs
has consumed an ever-increasing share of the Federal budget. Prior to
the creation of the Medicare and Medicaid programs, in 1962 mandatory
spending plus net interest accounted for about 32 percent of total
Federal spending. By 2002, this share had almost doubled to
approximately 63 percent of the budget (See fig. 5).
In much of the last decade, reductions in defense spending helped
accommodate the growth in these entitlement programs. This, however, is
no longer a viable option. Even before September 11, reductions in
defense spending were no longer available to help fund other claims on
the budget. Indeed, spending on defense and homeland security will grow
as we seek to combat new threats to our Nation's security.
Our long-term budget simulations continue to show that to move into
the future with no changes in Federal retirement and health programs is
to envision a very different role for the Federal Government. Assuming,
for example, that the tax reductions enacted last year do not sunset
and discretionary spending keeps pace with the economy, by midcentury
Federal revenues may only be adequate to pay Social Security and
interest on the Federal debt. Spending for the current Medicare
program--without the addition of a drug benefit--is projected to
account for more than one-quarter of all Federal revenues.\12\ To
obtain balance, massive spending cuts, tax increases, or some
combination of the two would be necessary (See fig. 6). Neither slowing
the growth of discretionary spending nor allowing the tax reductions to
sunset eliminates the imbalance.
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It is important as well to look beyond the Federal budget to the
economy as a whole. Figure 7 shows the total future draw on the economy
represented by Social Security, Medicare, and Medicaid. Under the 2002
Trustees' intermediate estimates and the Congressional Budget Office's
(CBO) most recent long-term Medicaid estimates, spending for these
entitlement programs combined will grow to 14.1 percent of GDP in 2030
from today's 8.3 percent. Taken together, Social Security, Medicare,
and Medicaid represent an unsustainable burden on future generations.
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This testimony is not about the complexities of Medicare, but it is
important to note that Medicare presents a much greater, more complex,
and more urgent fiscal challenge than does Social Security. Unlike
Social Security, Medicare growth rates reflect not only a burgeoning
beneficiary population, but also the escalation of health care costs at
rates well exceeding general rates of inflation. Increases in the
number and quality of health care services have been fueled by the
explosive growth of medical technology. Moreover, the actual costs of
health care consumption are not transparent. Third-party payers
generally insulate consumers from the cost of health care decisions.
These factors and others contribute to making Medicare a much greater
and more complex fiscal challenge than even Social Security.
When Social Security redeems assets to pay benefits, the program
will constitute a claim on real resources in the future. As a result,
taking action now to increase the future pool of resources is
important. To echo Federal Reserve Chairman Greenspan, the crucial
issue of saving in our economy relates to our ability to build an
adequate capital stock to produce enough goods and services in the
future to accommodate both retirees and workers in the future.\13\ The
most direct way the Federal Government can raise national saving is by
increasing government saving. Ultimately, as this committee recommended
last fall, we should attempt to return to a position of surplus as the
economy returns to a higher growth path. This would allow the Federal
Government to reduce the debt overhang from past deficit spending,
provide a strong foundation for future economic growth, and enhance
future budgetary flexibility.
Similarly, taking action now on Social Security would not only
promote increased budgetary flexibility in the future and stronger
economic growth but would also make less dramatic action necessary than
if we wait. Perhaps the best way to illustrate this is to compare what
it would take to achieve actuarial balance at different points in time
by either raising payroll taxes or reducing benefits.\14\ Figure 8
shows this. If we did nothing until 2041--the year the trust funds are
estimated to be exhausted--achieving actuarial balance would require
changes in benefits of 31 percent or changes in taxes of 45 percent. As
figure 8 shows, earlier action shrinks the size of the necessary
adjustment.
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Thus both sustainability concerns and solvency considerations drive
us to act sooner rather than later. Trust fund exhaustion may be nearly
40 years away, but the squeeze on the Federal budget will begin as the
baby boom generation starts to retire. Actions taken today can ease
both these pressures and the pain of future actions. Acting sooner
rather than later also provides a more reasonable planning horizon for
future retirees.
Evaluating Social Security Reform Proposals
As important as financial stability may be for Social Security, it
cannot be the only consideration. As a former public trustee of Social
Security and Medicare, I am well aware of the central role these
programs play in the lives of millions of Americans. Social Security
remains the foundation of the Nation's retirement system. It is also
much more than just a retirement program; it also pays benefits to
disabled workers and their dependents, spouses and children of retired
workers, and survivors of deceased workers. Last year, Social Security
paid almost $408 billion in benefits to more than 45 million people.
Since its inception, the program has successfully reduced poverty among
the elderly. In 1959, 35 percent of the elderly were poor. In 2000,
about 8 percent of beneficiaries aged 65 or older were poor, and 48
percent would have been poor without Social Security. It is precisely
because the program is so deeply woven into the fabric of our Nation
that any proposed reform must consider the program in its entirety,
rather than one aspect alone. Thus, GAO has developed a broad framework
for evaluating reform proposals that considers not only solvency but
other aspects of the program as well.
The analytic framework GAO has developed to assess proposals
comprises three basic criteria:
<bullet> The extent to which a proposal achieves sustainable
solvency and how it would affect the economy and the Federal budget;
<bullet> the relative balance struck between the goals of
individual equity and income adequacy; and
<bullet> how readily a proposal could be implemented,
administered, and explained to the public.
The weight that different policymakers may place on different
criteria will vary, depending on how they value different attributes.
For example, if offering individual choice and control is less
important than maintaining replacement rates for low-income workers,
then a reform proposal emphasizing adequacy considerations might be
preferred. As they fashion a comprehensive proposal, however,
policymakers will ultimately have to balance the relative importance
they place on each of these criteria.
financing sustainable solvency
Historically, Social Security's solvency has generally been
measured over a 75-year projection period. If projected revenues equal
projected outlays over this time horizon, then the system is declared
in actuarial balance. Unfortunately, this measure is itself unstable.
Each year, the 75-year actuarial period changes, and a year with a
surplus is replaced by a new 75th year that has a significant deficit.
This means that, changes that restore solvency only for the 75-year
period will not hold. For example, if we were to raise payroll taxes
immediately by 1.87 percentage points of taxable payroll today--which,
according to the 2002 Trustees' Report, is the amount necessary to
achieve 75-year balance--the system would be out of balance next year.
This is the case because actions taken to close the 75-year imbalance
would not fully address the projected deficit in year 76 of 6.49
percent of taxable payroll. Reforms that lead to sustainable solvency
are those that avoid the automatic need to periodically revisit this
issue.
As I have already discussed, reducing the relative future burdens
of Social Security and health programs is essential to a sustainable
budget policy for the longer term. It is also critical if we are to
avoid putting unsupportable financial pressures on future workers.
Reforming Social Security and Federal health programs is essential to
reclaiming our future fiscal flexibility to address other national
priorities.
balancing adequacy and equity
The current Social Security system's benefit structure strikes a
balance between the goals of retirement income adequacy and individual
equity. From the beginning, benefits were set in a way that focused
especially on replacing some portion of workers' pre-retirement
earnings. Over time other changes were made that were intended to
enhance the program's role in helping ensure adequate incomes.
Retirement income adequacy, therefore, is addressed in part through the
program's progressive benefit structure, providing proportionately
larger benefits to lower earners and certain household types, such as
those with dependents. Individual equity refers to the relationship
between contributions made and benefits received. This can be thought
of as the rate of return on individual contributions. Balancing these
seemingly conflicting objectives through the political process has
resulted in the design of the current Social Security program and
should still be taken into account in any proposed reforms.
Policymakers could assess income adequacy, for example, by
considering the extent to which proposals ensure benefit levels that
are adequate to protect beneficiaries from poverty and ensure higher
replacement rates for low-income workers. In addition, policymakers
could consider the impact of proposed changes on various
subpopulations, such as low-income workers, women, minorities, and
people with disabilities. Policymakers could assess equity by
considering the extent to which there are reasonable returns on
contributions at a reasonable level of risk to the individual, improved
intergenerational equity, and increased individual choice and control.
Differences in how various proposals balance each of these goals will
help determine which proposals will be acceptable to policymakers and
the public.
implementing and administering proposed reforms
Program complexity makes implementation and administration both
more difficult and harder to explain to the public. Some degree of
implementation and administrative complexity arises in virtually all
proposed changes to Social Security, even those that make incremental
changes in the already existing structure. However, the greatest
potential implementation and administrative challenges are associated
with proposals that would create individual accounts. These include,
for example, issues concerning the management of the information and
money flow needed to maintain such a system, the degree of choice and
flexibility individuals would have over investment options and access
to their accounts, investment education and transitional efforts, and
the mechanisms that would be used to pay out benefits upon retirement.
Harmonizing a system that includes individual accounts with the
regulatory framework that governs our Nation's private pension system
would also be a complicated endeavor. However, the complexity of
meshing these systems should be weighed against the potential benefits
of extending participation in individual accounts to millions of
workers who currently lack private pension coverage.
Continued public acceptance and confidence in the Social Security
program require that any reforms and their implications for benefits be
well understood. This means that the American people must understand
why change is necessary, what the reforms are, why they are needed, how
they are to be implemented and administered, and how they will affect
their own retirement income. All reform proposals will require some
additional outreach to the public so that future beneficiaries can
adjust their retirement planning accordingly. Yet the more transparent
the implementation and administration of reform, and the more carefully
such reform is phased in, the more likely it will be understood and
accepted by the American people.
With regard to proposals that involve individual accounts, an
essential challenge would be to help the American people understand the
relationship between their individual accounts and traditional Social
Security benefits, thereby ensuring that any gaps in expectations about
current or future benefits are avoided. In addition, increasing the
public's level of sophistication and understanding of how to invest in
the market, the relationship between risk and return, and the potential
benefits of diversification presents an education challenge that must
be surmounted so that the American people have the necessary tools to
secure their future. The Enron collapse helps to illustrate the
importance of this, as well as the need to provide clear and
understandable information so that the public can make informed
retirement decisions.
Conclusion
Early action to address the financing problems of Social Security
yields the highest fiscal dividends for the Federal budget and provides
a longer period for future beneficiaries to make adjustments in their
own planning. The events of September 11 and the challenges of
combating terrorism do not change this. In fact, the additional
spending that will be required to fight the war on terrorism and
protect our homeland will serve to increase our long-range fiscal
challenges. It remains true that the longer we wait to take action on
the programs driving long-term deficits, the more painful and difficult
the choices will become.
Although the program does not face an immediate solvency crisis as
it did in 1983, the fundamental nature of the program's long-term
financing challenge means that timely action is needed. The demographic
trends recognized in 1983 are now almost upon us. It is these
demographic trends--and their implications for both Social Security and
Medicare--that lead to the conclusion that the program faces both a
solvency and a sustainability problem. For the American people to
understand why change is necessary, a public education campaign will be
needed that focuses not just on Social Security but also on our long-
range fiscal challenges.
We will face many difficult choices in making Social Security
sustainable. Focusing on comprehensive packages of reforms that protect
the benefits of current retirees while achieving the right balance of
equity and adequacy for future beneficiaries will help to foster
credibility and acceptance. This will help us avoid getting mired in
the details and losing sight of important interactive effects. It will
help build the bridges necessary to achieve consensus.
Today I have described the three basic criteria against which GAO
thinks Social Security reform proposals may be measured. These may not
be the same criteria every analyst would suggest, and certainly how
policymakers weight the various elements may vary. However, if
comprehensive proposals are evaluated as to (1) their financing and
economic effects, (2) their effects on individuals, and (3) their
feasibility, we will have a good foundation for devising agreeable
solutions, perhaps not in every detail, but as an overall reform
package that will meet the most important of our objectives.
Today many retirees and near-retirees fear cuts that will affect
them while young people believe they will get little or no Social
Security benefits. As I said at the start of my testimony, we believe
it is possible to structure a Social Security reform proposal that will
exceed the expectations of all generations of Americans. Yes, we
believe there is a window of opportunity to craft a solution that will
protect Social Security benefits for the Nation's current and near-term
retirees, while ensuring that the system will be there for future
generations. However, this window of opportunity will close as the baby
boom generation begins to retire. As a result, we must move forward to
address Social Security because we have other major challenges
confronting us. The fact is, compared to addressing our long-range
health care financing problem, reforming Social Security will be easy
lifting.
It is my hope that we will think about the unprecedented challenge
facing future generations in our aging society. Relieving them of some
of the burden of today's financing commitments would help fulfill this
generation's stewardship responsibility to future generations. It would
also preserve some capacity for them to make their own choices by
strengthening both the budget and the economy they inherit. We need to
act now to address the structural imbalances in Social Security,
Medicare, and other entitlement programs before the approaching
demographic tidal wave makes the imbalances more difficult, dramatic,
and disruptive.
We at GAO look forward to continuing to work with this committee
and the Congress in addressing this and other important issues facing
our Nation.
Mr. Chairman, Mr. Spratt, members of the committee, that concludes
my statement. I'd be happy to answer any questions you may have.
End Notes
1. U. S. General Accounting Office, Social Security: Criteria for
Evaluating Social Security Reform Proposals, GAO/T-HEHS-99-94
(Washington, D.C.: Mar. 25, 1999); Social Security: The President's
Proposal , GAO/T-HEHS/AIMD-00-43 (Washington, D. C.: Nov. 9, 1999);
Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T (Washington,
D.C.: Feb. 27, 2002).
2. In this testimony, the term ``trust funds'' refers to the Old-
Age and Survivors Insurance and Disability Insurance Trust Funds.
3. Strengthening Social Security and Creating Personal Wealth for
All Americans (Dec. 21, 2001; rev. March 19, 2002).
4. This calendar year estimate is based on projected tax receipts
and outlays in constant 2002 dollars under the intermediate assumptions
of the 2002 Trustees' Report.
5. United Nations Population Division, Replacement Migration: Is it
a Solution to Declining and Aging Populations? (March 2000).
6. Income tax revenue resulting from taxation of up to 50 percent
of Social Security benefits for certain higher income beneficiaries is
credited to the OASI and DI trust funds and provided a little more than
2 percent of total income in 2001.
7. Under current law, the Secretary of the Treasury as trustee may
purchase marketable Treasury and agency securities if the Secretary
determines that such purchase is ``in the public interest.'' Such
purchases have been rare. As of the end of calendar year 2001, about
0.003 percent of OASDI trust fund holdings were in marketable Treasury
securities.
8. For a discussion of trust funds and other earmarked funds in the
budget, see U.S. General Accounting Office, Federal Trust and Other
Earmarked Funds: Answers to Frequently Asked Questions, GAO-01-199SP
(Washington D.C.: Jan. 2001).
9. Under current accounting standards, the long-term funding gap--
the difference between promised benefits and expected contributions--
for Social Security and Medicare is reported as required supplementary
stewardship information but not treated as a liability in the
government's financial statements. The recognized liability is the
amount of benefits due and payable to or on behalf of beneficiaries at
the end of the reporting period.
10. Separately, the DI fund is projected to be exhausted in 2028
and the OASI fund in 2043.
11. If the unified budget is in surplus at this point, then
financing the excess benefits will require less debt redemption rather
than increased borrowing.
12. This simulation assumes that all promised benefits would be
paid in full throughout the 75-year projection period.
13. Testimony before the Committee on Banking, Housing, and Urban
Affairs, U.S. Senate, July 24, 2001.
14. Solvency could also be achieved through a combination of tax
and benefit actions. This would reduce the magnitude of the required
change in taxes or benefits compared to making changes exclusively to
taxes or benefits as shown in figure 8.
Chairman Nussle. Thank you.
As I said, this is one of the first things that Mr. Spratt
suggested to me when I took over as chairman of the committee;
that he wanted to focus on this and highlight this and have a
hearing on this, and so, I would like to invite him to go first
in the questioning.
Mr. Spratt. General Walker, obviously one way to restore
some solvency to Social Security for the long run is to
increase the rate of the return on the assets in the trust
fund.
Have you given any thought or analysis to how we might do
that, using the traditional structure that we have now, a trust
fund invested in government bonds? Have you considered the
possibility that it might be invested in equities or corporate
bonds in order to increase the yield or return of the trust
fund?
Mr. Walker. Obviously, to the extent that the Congress
decided to more actively invest these funds, then based upon
modern portfolio theory, having a diversified portfolio of
assets, one should be able to achieve a greater rate of return
over time.
At the same point in time, Mr. Spratt, as you know, that
also has implications on the budget. Because my understanding
is, under the current budget rules--and Director Crippen can
verify this or correct me--that if you end up using that cash,
and then make an investment, that is counted as an expenditure
at the present point in time.
So, from an economic standpoint, your point is well taken.
In fact, one of the things I think that this committee needs to
think about is, how do we keep score? We currently keep score
based upon, largely, cash flow concepts and 10-year horizons,
which ignore the economic reality and which also ignores the
fact that most of our budget challenges are, after 10 years,
big budget challenges.
Mr. Spratt. Well, we can easily change that rule and simply
stipulate by another rule that if economic assets are
purchased, they should not be treated the same as if a
consumable service or commodity was purchased.
Have you calculated what we would need to realize as a rate
of return on the trust fund, the return that we can expect
under existing circumstances in order to keep it solvent for
the next 70 years?
Mr. Walker. Well, what we can do is, we can make some
assumptions, where we would end up taking, for example, the
number in the financial statements of the U.S. Government,
which is the discounted present value of the unfunded liability
that exists right now, over the next 75 years. And we could
compare what a more likely return would be on a more
diversified portfolio of assets versus that and come up with
what the difference in the number would be.
That might be helpful to you. I think it would illustrate
your point.
[The information referred to follows:]
GAO's Calculated Rate of Return on Trust Fund Assets
In response to your request, we calculated the rate of return on
trust fund assets that would be necessary to achieve trust fund
solvency for 75 years. Our calculations are based on the data and
intermediate assumptions presented in the 2002 Trustees' Report. In
order to simplify the calculation, we assumed immediate investment of
all current and projected future assets of the combined Old-Age and
Survivors Insurance and Disability Insurance (OASDI) trust funds. We
found that the rate of return over the 75-year projection period would
have to be increased 2.5 percent from the 3 percent real rate of return
assumed by the Trustees to a real rate of 5.5 percent to achieve
combined trust fund solvency through 2076. We discussed this estimate
with the staff at the Office of the Chief Actuary, Social Security
Administration, who agreed that our estimate was reasonable.
As noted, this calculation assumes that the entire combined trust
fund balance of more than $1 trillion is immediately invested and earns
that rate of return over the entire 75-year period. Hypothetically, the
trust fund could redeem its existing balance of more than $1 trillion
in Treasury securities, but its investment could potentially be
disruptive to financial markets. In addition, investment of trust fund
assets in private markets would have immediate consequences for the
Federal budget. Social Security cash surpluses would not be available
to finance other government activities. In addition, reinvesting
existing trust fund balances would mean that the Treasury would have to
repay money previously borrowed from the trust fund. In 1998, GAO
issued a report that examined issues raised by government investment of
Social Security funds in the stock market with the intention of earning
higher returns.* Our 1998 report stated that allowing the Social
Security trust fund to invest in the stock market is a complex proposal
that would have potential consequences for the trust fund, the U.S.
economy and Federal budget policy. Additional information and analyses
on related issues can be found in our 1998 report.
---------------------------------------------------------------------------
*Note.--Social Security Financing: Implications of Government Stock
Investing for the Trust Fund, the Federal Budget and the Economy. April
22, 1998, GAO/AIMD/HEHS-98-74.
Mr. Spratt. Well, if you can do that for the record, if you
can demonstrate what we would need to realize as a rate of
return on the trust fund in order for the trust fund to meet
its obligations through the stipulated time period, I think--
what is it, 75 years?
Mr. Walker. Yes. We will have to make some assumptions; we
will disclose those.
And I think the other thing, as you know, Mr. Spratt, which
is very important is that part of the problem with Social
Security is that even if you come into actuarial balance for
the 75-year period today, you know you are going to be out of
balance next year because of the way the numbers work. I mean,
the deficit is escalating each year.
Mr. Spratt. Well, obviously the problem with going out that
far is a lot of things we don't know about 2075.
Mr. Walker. That is true, although I think we have to also
learn some lessons that it is even tough to project 10 years,
much less 75. On the other hand, I think that we can't be
overly optimistic, because we know that some of these trends,
like demographics, aren't going away.
Mr. Spratt. You mentioned the net present value of the
shortfall in Social Security today. I have seen the number $3.3
trillion. Is that your calculation of what the shortage is on a
net present value basis?
Mr. Walker. It is around $3 trillion. I will provide it for
the record. And again that doesn't count Medicare, which is a
big one.
[The information referred to follows:]
Present Excess Value of the OASDI Program
According to the 2002 Financial Report of the United States
Government, for the OASDI program, the present value of the excess of
income (excluding interest) over expenditures for the 75-year period
2001-2075, taking into account the beginning trust fund balances and
the cost of attaining a target trust fund balance at the end of the
period, is $3.394 trillion.
Mr. Spratt. I understand that.
I don't have any further questions at this time. Thank you
very much.
Chairman Nussle. Let me start with what may be--what may
sound like good news, the trustees' report. I guess part of why
I am asking this is to highlight why it may not be good news
and why sometimes this gets confusing.
But this year's trustees' report shows that the dates of
cash flow deficits and insolvency for Social Security are
gradually receding, and that is often reported as good news and
assumed to be good news. Every time a year is added onto that,
or a period of time is added onto the solvency date, that is
championed or that is reported as being good news.
Can we really afford to feel secure about the fact that
that solvency date appears to be receding slightly?
Mr. Walker. In my opinion, Mr. Chairman, solvency is one
measure that you should look at. However, it is only one. And,
in fact, if you just look at the solvency measure, it can give
you a false sense of security and potentially a misleading
picture as to what the condition of Social Security is.
I think you also have to look at, when does Social Security
turn a negative cash flow? Because once it starts, you know,
turning a negative cash flow, that has a very real impact on
the budget.
In addition to that, you have to look at what percent
Social Security is to the overall budget and the overall
economy. Furthermore, you have to look at, how does Social
Security fit into the overall budget picture and the ability to
be able to deliver on not just Social Security promises, but
other promises that have been made.
So my personal view is that solvency is something to track,
but by no means is it the primary measure that Congress should
focus on.
Chairman Nussle. Why is it the primary measure that
Congresses focus on, or for that matter, the media? I mean,
that is the date that is reported. Banner headlines, that is
what is talked about. You will see it in every publication and
rag and everything else. Why is that the date that--should we
be tracking other dates or times or measures as primary
factors, as opposed to, seemingly, highlighting just that one
date or factor?
Mr. Walker. I would argue that there are at least two dates
that are important. One date is when you turn negative cash
flow; another date is the insolvency date. I think those are
two key dates as a point in time. If you look at negative cash
flow, that is 2017, based on the most recent trustees' report.
If you look at when the cash flows start declining--right
now we are building positive cash flows--when they start
declining, that is 2006, based on the latest trustees' report.
I think this is part of the public education plan. First,
what does solvency mean? What does that date mean? What that
means is that if we don't do anything to Social Security by
that date, which is, I believe 2041, which is the insolvency
date----
Chairman Nussle. We have got a chart on this. I am not
trying to use--I am not trying to make you accept this chart,
but this is a chart that may--here is the chart.
This is, I think, what you are referring to. Just so we can
put it in some kind of a graphic, charted way, is this what you
are talking about?
Mr. Walker. I think what you are talking about here is the
blue line represents the trust fund. And the green line
represents cash flow income. The outgo is obviously
expenditures. And the date, as I recall, is--2041 I believe is
the date that the combined OASDI trust fund is supposed to be
insolvent.
What that means is, if Congress does nothing between now
and then, if all trustees' intermediate assumptions prove to be
valid as of that date you would end up having to decide what
you are going to do about the approximate 25-percent shortfall
between the revenues that are coming in in that program every
year and the promises that have to be paid in that year.
That is obviously not a desirable state, to wait until you
spend every last dime. Then, all of a sudden, you have this
significant shortfall that has to be addressed, which shortfall
increases year by year because of some of the demographic
trends and other factors that we talked about.
Mr. Spratt. Thank you, Mr. Chairman.
When you speak of a cash deficit in 2017, are you including
in the income to the trust funds interest payments and income
tax transfers?
Mr. Walker. The interest on the bonds I believe is not
included in that, because that is not a cash item. I believe if
you take total income, it would be about 2027.
So it is truly just what I said; it is cash flow. As you
know, the interest on the bonds is an accounting entry but it
is significant because it is a government commitment to pay in
the future.
Mr. Spratt. But we book the interest on the bonds as income
and use it to purchase other bonds, don't we?
Mr. Walker. That is correct.
Mr. Spratt. So it is treated as an asset by the trust fund?
Mr. Walker. It is an asset, it is income, but it is not
cash. In other words, what we do count is, we count payroll
taxes, we count the taxation that is attributable to taxation
of certain Social Security benefits where they are cash
amounts, but we don't count the notational interest on the
bonds because it is a non-cash item.
Chairman Nussle. Two more things quickly. One is the
Nation's gross domestic product is obviously going to be
growing. Some would possibly predict that it would grow much
more substantially than is being used as the basis for the
arguments that you are making, or that others make, about the
concern.
I have heard those who would suggest that we could grow out
of this, that somehow that there may be a bump for the baby
boomers; but by and large, this could be taken care of by
growth in the economy.
Would you address that either in favor or against?
Mr. Walker. Well, first, this does assume growth in the
economy generally consistent with CBO's assumptions. So you can
ascertain whether you believe they are reasonable or not. There
is growth in the economy that is assumed as part of this
analysis.
My personal opinion is that reasonable people can differ as
to whether or not you can grow out of part of, or all of, the
Social Security problem. What you are not going to grow out of,
in my opinion, is the larger fiscal problem. In other words, if
you look at the degree of imbalance that I showed up there on
the ``haircut, the decapitation and the disembodiment'' chart,
there is something you are not going to grow out of in my
opinion.
Chairman Nussle. The last thing I would like you to just
address is your second-to-last page of your presentation. If
you want to put it up, that would be great. It is basically
your criterion for evaluating Social Security reform proposals.
You went over that very quickly.
Would you just expand on your three points for the members,
what you mean by those three points as we begin to possibly
take a look at some solutions in the near future?
Mr. Walker. Well, these are very high levels. We have a
number of sub-elements for each one. It is available on our Web
site. But at the highest levels, financing sustainable
solvency, the idea that we have been talking about, solvency
has some significance, but it is not everything. It can be
misleading. You need to look at what has to be done not only to
be able to make the program solvent, but to be able to make the
program sustainable as a percentage of the budget, as a
percentage of the economy over time.
Secondly, balancing adequacy and equity in the benefit
structure. Whatever changes you make, consideration has to be
given to different income levels and different resource levels
of the individuals involved and what likely effect that is
going to have on them, and then equity between generations,
equity between different classes of individuals in whatever
changes you are considering making.
And then thirdly, implementing and administering reforms.
To what extent are there going to be transition challenges? To
what extent are there going to be administrative challenges
associated with whatever reform proposals you may consider?
To the extent that you are talking about reforming the
existing defined benefit structure, that is one thing. To the
extent that you are considering individual accounts, either as
an optional or as a mandatory element of reform, then that
raises a whole new range of implementation issues that you need
to think about from the standpoint of how are you going to end
up handling the record-keeping, what are you going to do about
the investments, what are you going to do about investment
education?
Those are solvable problems, but they are significant
challenges that have to be adequately focused on both as to the
structure and the timing of implementation of any such
proposal.
Chairman Nussle. Thank you.
I would just observe before I recognize, I guess Mr.
Bentsen, Mr. Spratt and I just had a 15-minute conversation
with the Comptroller General, and I don't think politics was
invoked once. I don't know if that can be sustained, but I will
tell you, if we can't have a conversation about this in this
country, about this challenge, and do it in a non-political
way, we are not going to address it. I think we have proven
that we can. Maybe that is, in part, why we don't have
jurisdiction. I don't know.
But I am very serious about that. I think there are ways
that we can have conversations about this, even though people
can have their differences of opinion.
Mr. Walker. Can I touch on that, Mr. Chairman?
Chairman Nussle. Please.
Mr. Walker. In a prior life, I was a trustee of Social
Security and Medicare. I was Assistant Secretary of Labor for
pensions and health and head of the Pension Benefit Guaranty
Corporation. And because I have a lot of background in pensions
and health, as well as other areas, I was afforded the
opportunity to participate in some of these town hall meetings
that former President Clinton, former Vice President Gore and
other bi-partisan leaders held around the country as part of an
education effort to try to educate the American people on the
nature, extent, and timing of the problem, and to try to put it
in context. That has to happen.
What I found is, the American people are a lot brighter
than sometimes we give them credit for. And, if you give them
the facts, they can understand the need for some type of
change.
Reasonable people can differ on what those changes should
be. But one of the things that has to happen is, there needs to
be a public education effort which is part of that political
leadership and personal courage that has to happen to get a
little bit out front, because realistically, Congress is not
going to act until the American people have a better
understanding of the nature and extent and magnitude of the
problem, because you obviously have to stand for reelection.
By the way, Mr. Spratt, the interest is included in the
trust fund balance; it is included in that. But, it is not
included in the cash flow analysis.
Mr. Spratt. That is kind of a quirk of our accounting. I
mean, if we booked interest as a real cost, even though we were
paying it to ourselves, usually as trustee, our bottom line
would look a lot different today.
I think it is one of the anomalies in Federal bookkeeping
that we really ought to give more serious attention to.
Mr. Walker. I think you are right. One of the things that
we need to do is, we need to take another look at the
accounting and disclosure for Social Security and Medicare
obligations. Right now, under generally accepted accounting
principles for the Federal Government, the bonds that are held
in the trust fund are not shown as a liability in the
consolidated financial statement of the U.S. Government.
The reason it is not shown as a liability is because the
right hand owes the left hand. Just as in the private sector,
you eliminate those types of transactions on consolidation.
At the same point in time, the unfunded obligation between
promised benefits and funded benefits, that approximate $3.4
trillion number that we talked about before, just for Social
Security, is not shown as a liability. It is disclosed. It is
contained in a separate statement, which is a positive step.
But I think one of the things that we need to do--and I
have shared with this with my colleagues on the Joint Financial
Management Improvement program, including the Secretary of the
Treasury and the Director of OMB--is that we need to have a
discussion and debate about whether or not the current
accounting treatment should go further.
I expect that that will end up happening within the next
year or so.
Mr. Spratt. Thank you, sir.
Chairman Nussle. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman.
Mr. Walker, I don't want to debate what are on the margins,
but I do think on the interest that Mr. Spratt brings up, there
is a legal obligation for that interest.
You are right, we don't account for it in the same way that
we don't account for some other trust funds we have out there:
the BIF fund, the Safe fund and other things like that. But
there is a legal obligation that presumably Congress is going
to honor; otherwise, it would probably have somewhat
catastrophic effects on the Treasury market and others. So I
think we have to count it.
But you are right. In a $3.4 trillion present value
deficit, we are debating on the margins here. When you talk
about this gap, this deficit, the cash flow deficit and the
long-term cash flow deficit, and you say we are going to have
to have either benefit reductions or increased revenues, or
some combination thereof; and you--but you do that based upon
demographic projections, which I think--I think your
assumptions--I don't know whether your assumptions are
accurate, but I think your ingredients are accurate that you
have to look at that.
Is it true that regardless of whether there was a--and I am
not trying to make it political or anything--when we had the
Social Security task force a couple of years ago, and we had
Alan Greenspan come and talk to us about this in an off-the-
record luncheon, he made this point. This is more of a societal
problem, where you have a universal pension safety net program;
and whether it was--whether it is operated through a Federal
Government trust fund program, as it is right now, or whether
or not it was operated through a private sector or
privatization concept of some sort, where there was a
guaranteed benefit level, which is the case right now, that
deficit would exist. Is that correct?
I mean, one way or the other, the economy has to pick it
up? It scores against GDP, whether it is governmental or non-
governmental?
Mr. Walker. Yes.
But the way to really look at it is, we call this a ``trust
fund.'' This is not a traditional trust fund in the sense that
you and I or, frankly, the American people would normally refer
to as a ``trust fund.''
What ``trust fund'' means in this context is an accounting
device. It is a sub-account within the overall financial
statements of the U.S. Government.
Now, don't get me wrong. The fact that this trust fund
holds government securities backed by the full faith and credit
of the U.S. Government, guaranteed as to principal and
interest, has not only legal significance; it has, economic and
moral significance as well.
But, you know, this is not a fund that is backed by hard
assets that are actively invested.
So you really have several options. When you turn a
negative cash flow to deal with the long-range problem, you
need more income, less benefits, more debt held by the public;
or to try to figure out a way that you can increase rate of
return. Through actively funding, you might end up helping to
reduce the problem on a discounted present value basis over
time.
Mr. Bentsen. I guess I agree with that.
But I guess my question is this: Isn't there generally an
unfunded liability of pension obligations, both within the
government and outside of the government, that we are having to
make through either--through either income-generating assets,
or whatever, we are having to make up?
So this is more of a societal program that other nations
around the world, as they age, are starting to face as well.
And whatever you end up with--with whatever proposal, the
cost--there is a cost associated with it whether you privatize,
or don't privatize, whatever. That cost is either in the form
of a reduction in benefits or an increase in up-front
contribution.
Mr. Walker. I think your point is that it has a
macroeconomic impact, it has a broader impact, which is true.
There is one bit of good news here, but let's not get too
enthusiastic. The one little bit of good news is that we are a
lot more open and transparent about our challenges in this
regard, and in fact, our challenges in this regard are not
nearly as great as some other industrialized nations. That is
the good news.
The bad news is that some developing countries are ahead of
us. Some developed countries are also ahead of us in trying to
deal with this long-range problem.
Mr. Bentsen. Thank you.
Chairman Nussle. Mr. Gutknecht.
Mr. Gutknecht. Thank you, Mr. Chairman.
Mr. Walker, thank you for coming up. I am reminded,
listening to your testimony, of something that Winston
Churchill said almost 70 years ago. He said, Americans always
do the right thing, once we have exhausted every other
possibility.
I am afraid what I see happening is, we are sort of going
down that path again. I have asked to put this pie chart up
that you started your remarks with. This is a troubling pie
chart, at least it is to me, when you see how much of our total
Federal budget has gone basically to entitlement programs. What
troubles me is, with all due respect to friends on the Ways and
Means Committee last night, they passed a bill claiming to
spend roughly $350 billion over the next 10 years on a new
entitlement called prescription drugs.
Your colleague--or your partner in crime, sitting beside
you there--Mr. Crippen and his people, recently did a study.
They estimate that seniors alone will spend over $1.8 trillion
on prescription drugs over the next 10 years. My concern is, we
are doing almost nothing on what I think is the big issue. That
is, affordability.
We are allowing the pharmaceutical industries to literally
take all of their profit, all of their research dollars, all of
their marketing dollars from the pockets of American consumers.
We are doing very little in terms of opening up free markets to
allow Americans access to drugs at world prices which are
dramatically lower than here in the United States. But that is
for another day.
But my issue is, when you look at these charts--first
question: do you estimate that the net interest--and there is
some good news/bad news in these charts--the net interest went
from 6 percent to 11 percent. We are now down to 9 percent,
roughly.
As you go forward, what is your estimate? Will that
percentage go up, stay the same, or will it come down?
Mr. Walker. If you go to the next chart, you will see it.
Mr. Gutknecht. OK.
Mr. Walker. The next one, interest is the dark blue. And so
you can see as a percentage of the economy rather than as a
percentage of the budget--it goes down and then starts to
escalate after about 2015. It rapidly escalates after that.
Part of that has to do with the fact that you turn negative
cash flow in both Social Security and Medicare. And if you
don't end up doing something on the revenue side and/or the
benefit side, then it assumes you are going to increase debt
held by the public, which means that your interest expense is
going to start going back up.
So that is how it looks over those periods of time.
Mr. Gutknecht. That is my concern, that as we go forward if
we open up more and more entitlements under Medicare, which we
are not adequately funding today--when I talk to my rural
health care providers, they are not happy; in fact, more than a
hundred providers in Colorado have now said that they won't
take any new Medicare recipients.
So we have got a whole lot of things that are converging. I
do want to close though and come back.
You mentioned in your testimony just recently, in response
to the last question, there are other countries that are moving
forward. Germany is one of them, under the leadership of what
we would describe as a liberal government in Germany. They did
begin the process of creating a personalized retirement system;
and I just want to share with you and my colleagues what they
have done.
Originally, Germans were allowed to put up to 1 percent of
their pay into these retirement accounts. That will rise to 4
percent by 2008. And the amazing news--this is according to the
German press--is that their original estimates--they are going
to dramatically surpass their original estimates in terms of
how much these accounts are going to be worth.
Deutsch Bank is now estimating, by 2009, the new capital
that will be included in these new accounts could reach 160
billion Euros, which is roughly US$138 billion by 2009. So the
point is that there are other governments, clearly left-of-
center governments that are moving forward with reform of their
Social Security systems. And it may well be that there is hope
that we in the United States will ultimately do the right
thing.
Mr. Walker. One of the things that we have done at GAO is
issued reports on what some other countries have done in this
area. I believe it is important for us to do that, not just in
the area of Social Security, but health care, the environment
and a number of other areas, because we live largely in a
borderless world where we face many shared challenges.
So, therefore, it is important to try to learn from others.
What did they do? What worked? What didn't work? But we
obviously have to apply that to our system and our culture and
our values and, hopefully, we will do that in time.
Chairman Nussle. And just to remind members that we had an
excellent hearing and summit of budget chairmen just this last
week, the OECD, that discussed this very topic. And another
example of--maybe not the exact model Mr. Gutknecht approved,
but as a political way to handle it, Sweden may be a good
example. They held hands together in a total partisan way, in a
total political way, and decided to make the decision.
So there are some models out there that are worth taking a
look at. We tried to highlight that at the committee.
Ms. Hooley.
Ms. Hooley. Thank you. Would you do just a little
explaining to me about--and I apologize if this question has
been asked. But as you look at privatization for Social
Security, what kind of cuts are we going to have to make to
benefits to make that happen? And when do we ever get a return
on that? And do individuals have their own accounts, or is
that--or are those accounts pooled where they have some choices
within that pooling?
Mr. Walker. Well, first, one would have to have a specific
proposal, because obviously there are a number of different
proposals out there for different individual accounts. In my
personal opinion, having an individual account is not
equivalent to privatizing Social Security.
But the fact of matter is, to the extent that Congress
would decide, as a part of more comprehensive Social Security
reform, that it wanted to have individual accounts as an
element, first it would have to decide, is it going to be
voluntary? Is it going to be mandatory?
Is it going to be an add-on to the defined benefit? Is it
going to be a substitute for a portion of the defined benefit?
If so, are you going to make other changes?
Are you going to do something with the retirement age? Are
you going to do something with the indexing, something with the
bend points in calculation of the replacement ratios?
And so there are a lot of questions that would have to be
answered in order to be able to--for me to give any specific
numbers or percentages in that regard.
We have analyzed several past Social Security reform
proposals, and we are in the process of analyzing the three
Social Security reform proposals that the Commission came out
with for another committee, which we expect will be available
late in the year.
Ms. Hooley. Do you have these?
Mr. Walker. No. We are running them through an economic
model.
We have an economic model we use for Social Security
reform. We will have the results later this year, but we don't
have the numbers yet. But that would be helpful to you.
Ms. Hooley. Since we spent all this surplus, what would be
your opinion about the best things to do with Social Security
to make sure that it is there in the future, and that we do not
lower the benefits?
Mr. Walker. Well, I think there are several reasons we
don't have the surplus now.
Ms. Hooley. I know, but let's just talk about, we don't
have it. So what would be your solution to making sure that
Social Security is there in the future, and that we do not
lower the benefits?
Mr. Walker. I think part of it is to create additional
fiscal discipline over the budget and the spending process
going forward. Being able to look at what the longer-term
implications of current or proposed actions as to whether or
not they are making our situation better or worse in the long
term; and then obviously trying to do what can be done to fuel
economic growth.
And to the extent that there are surpluses generated, to
use that in a way that starts reducing debt--in order to
provide additional fiscal flexibility going forward.
I have testified on behalf of GAO before as to the range of
options that Congress has to try to help deal with the long-
range fiscal challenge and the different levels of risk; and I
would be happy to provide that to you, which I think would be
helpful.
Ms. Hooley. Do you think it should be privatized?
Mr. Walker. I don't know of anybody who is talking about,
quote, unquote, ``privatizing the Social Security system''--I
mean, a situation where it would not be a government program
and where there wouldn't be any government guarantees, where
there wouldn't be any government involvement.
I do know a lot of people who are talking about the
possibility of using individual accounts as an element of more
comprehensive Social Security reform. I think that is something
that is worth serious consideration. But I think it has got to
be a piece of an overall package.
I wouldn't want to make a hypothetical recommendation. I
don't think it is appropriate for me to do.
Ms. Hooley. Thank you.
Chairman Nussle. Thank you.
Mr. Toomey.
Mr. Toomey. Thank you, Mr. Chairman. I would like to follow
up on this line of questioning that my colleague just began,
because specifically, I think it is important that we address
head on this question of whether personal accounts somehow
necessitate benefit cuts.
If you stop and think about where we are today, the current
system in its current form, it seems to me if we don't do
anything to reform this system, if we leave it exactly as it
is, then we are assured of benefit cuts, either in the form of
absolute cuts, because the cash flow isn't there to pay the
promised benefits or, at a minimum, dramatic cuts in the rate
of return on the money that people put into the system, because
it would require a dramatic tax increase in order to fund the
benefits as currently promised.
Is that a fair way to characterize the current system?
Mr. Walker. I think--to be balanced, I would have to say
that if you don't do anything, it assumes you are going to have
to significantly increase taxes or cut benefits.
Mr. Toomey. Which drives down returns.
Mr. Walker. Or significantly cut benefits, or some
combination.
Mr. Toomey. So as I see it, the current season, unreformed,
if we pretend that we don't have a problem here and we leave it
unaddressed, that leads to dramatic cuts, at a minimum, in the
return to workers or in the absolute benefits.
I would also like to touch on this issue of whether there
is something somehow inevitable about a major societal problem
in any kind of retirement plan, and I would appreciate your
comment on this. It seems to me that it, rather, depends very
much on the structure of the plan.
And we have a plan in which we have an unfunded defined
benefit system, and we are relying on an ever-growing work
force to fund it, which we know we are not going to have in
relation to the number of retirees; and that an alternative
system in which you have a prefunded, essentially--at least if
a component of this were to be prefunded--invested in the
economy, able to generate market rates of return, and then that
that would provide some component.
If you move in that direction, you can indeed solve the
solvency problem permanently. Is that your view, that this can
done?
Mr. Walker. Not by itself.
I think what you have to do is, if you go to an individual
account structure, then you have to decide how you are going to
handle the transition obligation. You are going to have to
solve a number of administrative issues. Then you are going to
have to decide whether or not you are going to allocate
additional general revenues, or whether or not you are going to
change the benefit structure as a way to close the gap.
You can help close the gap, you can help deal with the
rate-of-return issue with a funded system. That doesn't
necessarily solve your problem.
Mr. Toomey. I didn't mean to suggest that there wasn't a
significant transitional cost. There is.
My point is that it can be done in a fashion that is for a
finite period of time with a finite amount of money. It is
large, but it is finite and then it leads you to a system in
which you have a fundamentally different structure, where you
have a prefunded system, where you can assure generous benefit
system. You have just got to get to that structure.
Mr. Walker. It is possible to reform Social Security with
individual accounts coupled with other reform changes and
achieve sustainable solvency and other objectives over time.
Mr. Toomey. Thanks. I would like to go back to a chart
briefly, then--I am going to run out of time soon--which is the
chart that you have on page 15. If it is possible for us to
bring that back up, I would appreciate that. That is the bar
chart, I am thinking of.
Mr. Walker. The one that deals with the percentage of the
economy?
Mr. Toomey. That is correct. That is the one.
Let me ask a question. First of all, my assumption is that
you are referring--those numbers refer to Federal Government
spending.
Mr. Walker. That is correct.
Mr. Toomey. There is no representation here, no attempt to
represent State and local government spending.
Mr. Walker. Neither spending nor taxation.
Mr. Toomey. Right. Now, I might be off on this, but in very
rough terms, the number that comes to my mind for the total
amount of State and local spending in our country as a
percentage of GDP is something around 20 percent; is that
around the right ball park?
Mr. Walker. My director of budget says closer to 10.
Mr. Toomey. For the combined, all State and local?
Mr. Walker. Ten to 15 percent.
Mr. Toomey. Education systems, 10 to 15. If we took 10 to
15, if we assume that we maintain that level and we look at the
number for 2050, what are we up to? About 35, maybe more?
Mr. Walker. About 35 percent at the Federal level alone.
Mr. Toomey. We added the State and local component, we
would probably be--in excess of 50 percent of our GDP would be
in the hands of government and outside of the private sector.
Do you think that that is a formula--under that scenario,
we could probably have robust economic growth?
Mr. Walker. No.
Mr. Toomey. Thank you.
Mr. Hastings [presiding]. Mr. Price.
Mr. Price. Thank you, Mr. Chairman. Mr. Walker, welcome. I
apologize for my late arrival and hope that I won't be
redundant in the questions that I pose, but I would like to
pick up on the question of privatization.
Assuming for the purposes of discussion the three
alternative privatization schemes put forward by the
President's Commission, can you give some fix on the problems
that privatization might pose for the cash-flow of Social
Security revenues, the dates at which the cash-flow reverses,
and the dates at which we really do have a solvency problem?
The dates that we often hear discussed for the cash-flow
reversal are 2017, when the receipts coming in no longer exceed
the benefits going out, and then around 2040 or 2041, when the
trust fund is depleted. What effect would the privatization
schemes that the Commission put forward have on those dates,
those dates when real trouble develops?
Mr. Walker. We are in the process of conducting a
comprehensive analysis of those proposals based upon the
criteria that we recommended for Congress to consider,
including coming up with those dates that you are talking
about, those key dates, as well as whether or not they would
achieve sustainable solvency over time. That is not going to be
released for several more months, and so I would be happy to
make that available to you when we have it, but we don't have
it yet.*
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*Note.--This report will not be available until 2003.
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Mr. Price. Well, there may be some differences among the
three plans. The date that has been widely discussed is 2008.
That is when the cash-flow problems would develop almost 10
years earlier under a privatization scheme that would basically
skim off 2 percentage points from the payroll tax. Does that
seem like a plausible assumption?
Mr. Walker. It clearly would accelerate--and only two of
the three plans would restore solvency over time. I mean, we
know that based upon what we have seen right now, the dates
will change. We know only two of the three plans would restore
solvency over time, and we also know that two of the three
plans also proposed changes in the benefit structure whereas
the other plan is nothing more than really an add-on feature to
the existing program.
Mr. Price. I think the goal of giving people incentives to
save for their retirement is a widely shared goal. I don't
think there is any question our country needs to do that and
the Congress needs to do that. The question is should that come
out of Social Security or should we leave the basic structure
of Social Security intact and then provide additional
incentives for that kind of saving?
Nobody should assume that Social Security in and of itself
is an adequate retirement plan. It was never designed that way,
although many people today are solely dependent on Social
Security for retirement income. We clearly need to shore up
those other two legs of the proverbial three-legged stool, that
is private pension plans and also private savings.
Do you have any observations on the financial implications
of those two tracks above and beyond Social Security as opposed
to skimming off 2 percentage points from the payroll tax, which
would be a major change in Social Security?
Mr. Walker. Let me give you some general remarks on that.
First, you are correct in noting that Social Security is only
one leg of the so-called three-legged stool. You are also
correct in noting that we need to increase personal savings
because our personal savings rate is abysmally low, especially
as compared to other developed countries. I would respectfully
suggest that we are headed to a future where there is going to
be a four-legged stool for retirement income security. And,
that fourth leg is earnings from part-time employment. If
people don't end up doing more from the standpoint of trying to
increase their personal savings and given the fact that we have
been stuck at about a 50 percent coverage rate under the
private pension system and I think unrealistic--I mean I think
it is unrealistic to expect you are going to get much higher
than that under a voluntary system, and I am not saying it
shouldn't be voluntary. Why? Because of health care costs. The
No. 1 benefit of choice on behalf of employees is health care.
No. 2 is health care, No. 3 is health care. To the extent that
employers have to end up spending more money on health care,
they have less money for pensions and individuals have less
money for savings.
So one of the things we have to do here is to recognize
that this Social Security problem is a subset of a much bigger
problem, and the biggest problem is probably Medicare, Medicaid
and other health care issues.
Mr. Price. My time has expired. Thank you.
Mr. Hastings. Mr. Walker, thank you for being here and, Mr.
Spratt, thank you for encouraging this hearing to happen. I
just want to ask or make an observation and ask you to
elaborate on a statement that you made earlier. But before I do
that I have to say that I am a bit optimistic that something
can be done because there was a time not too ago that I can
recall where people were to even mention Social Security, that
you could almost be assured that if you are in a political
season there could be ads, leaflets or something saying that if
an individual talked about reforming Social Security that that
individual was throwing old people out on the streets. We have
come a long, long way from that.
In fact, the 2000 election, this was part of the debate and
there were potential solutions out there. So I tend to be
optimistic. I am not foolish enough to think that this won't be
a political issue in the future. But your observation with your
experience in the past having town hall meetings where the
American people understand I think is very encouraging. I, too,
have had the experience that you have suggested when I have had
my town hall meetings, and I will say in every one of my town
hall meetings the issue of Social Security comes up. And my
response has been, well, if we keep three principles in mind as
we start this process of reforming, number one, those that are
in the system or very near the system you don't change the
benefits. My parents, for example, are in their late 80s. You
simply can't change the rules. But for the boomers coming in
you have to figure out a time period when you say you are not a
boomer, but you give them flexibility.
That is the term I use with Social Security, and then we
can have some resolution to this. But the maximum of
flexibility has to be the younger generation. My children are
in their early 30s and 20s and they know this is not a good
deal over a period of time. They instinctively know that. I
think you alluded to that observation because where we are
heading unless we try to reform this system is we are going to
have a political debate of pitting grandparent against
grandchild, and the country simply ought not to get into that
debate.
What I would like you to do is elaborate more because you
said this is really an easy solution compared to the others
when you responded to Mr. Price of the Medicare challenges that
we have. Would you elaborate more on how you say this is easy
and what we should take from that from your perspective in
order to try to resolve this?
Mr. Walker. Part of it is building on what you just said,
and that is in my opinion, first, that Social Security is a
defined benefit promise. It is not like health care where it is
a defined level of coverage and where you really don't know
what your costs are going to be. So you have a lot more of an
ability to estimate what the current cost of this program is
likely to be than you do for Medicare and some other health
care programs. So that is a good start.
Secondly, if you assume that for people who are currently
retired and nearing retirement, you are not going to change the
promise. You are going to deliver on the promise. You are going
to give them what they expect. Then you take away the fear
factor that a lot of people have about Social Security reform.
If you then say baby boomers like myself who are discounting
Social Security--because they know there is a difference
between promised benefits and funded benefits--if you look at
my kids, you know Xers and Y generation who know it; who are
discounting the program even more, that means you have an
opportunity to reform the program with or without individual
accounts, although younger people are more accustomed to
individual accounts and that is something they can identify
with, and you could potentially use the power of compounding
over time to help deal with the problem. If you end up
reforming the program so you make relatively more dramatic
reforms and provide additional choices potentially for younger
people, then you have a way to reform the program which
provides for sustainable solvency over time and allows people
to do what they need to do to adjust for any changes in the
program that otherwise are going to occur. That, to me, is
exceeding the expectations of all generations of Americans. On
the other hand, Medicare is the opposite, but that is the
subject for a different hearing.
Mr. Hastings. Would you say as evidence of your observation
of how the boomers and the Gen X and Yers would respond to this
is the evidence of more people that have investments, whether
it is 401(k)s or IRAs or you name it, than what we have seen in
the past, would that be evidence to support your position?
Mr. Walker. Well, I think I try to base mine on facts, and
if you just look at the facts from the standpoint of what
percent are private employers have pension plans for their
employees and what is the nature of those plans, on a relative
basis there is a larger portion of defined contribution plans
today than there used to be 20 and 30 years ago. In addition,
there has been an increase in the percentage of those plans
that have 401(k) type salary reduction features where the
individuals have an opportunity to be able to select among
several different investment choices for the future.
One example of that is the Federal Thrift Savings Plan. The
Federal Thrift Savings Plan is the Federal Government's 401(k)
plan. I wouldn't call that as being privatized per se. It does
have individual accounts. It does have active investment, but
the government obviously is running it and it has a government
oversight board, although the assets are largely managed by
private sector investment managers.
So those would be a few of my thoughts on the subject.
Mr. Hastings. Thank you. Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman. We have gotten so high
tech and these new chairs now--has it been asked of the
witnesses--I am sorry, we were in an appropriations markup
earlier this morning--the relative cost of these proposals,
because I would like to measure the effect of the tax cuts
versus having used part of that tax cut for financing the
general revenue requirements for a reasonable privatization
proposal.
Mr. Walker. Mr. Moran, we are in the process of analyzing
the three proposals that came out of the President's Commission
on a variety of bases, including some of the factors that you
talk about, but that has not been completed and won't be
completed for several months. But when it is I will be happy to
make it available to you.
Mr. Moran. I appreciate that, Mr. Walker. I appreciate
everything you do and Dan and all of the witnesses we are going
to be hearing from. The problem is that--and at least it is my
concern about these proposals, all of which I think have some
merit, some more than others--is that the option of doing this
was precluded by the premature actions that we have taken by
reducing Federal revenue flow by $2 trillion for the next 10
years and by 4 to $7 trillion for the subsequent 10 years. It
seems to me we are going to need something in the range of a
trillion dollars to pay for the creation of individual savings
accounts to complement Social Security and eventually
transition to those accounts, those complementary accounts. But
to do so you can't reduce benefits, so you have to have an
infusion of general revenue money. And by the rate cuts which
take effect--start to take effect in a few years and hit us
most strikingly just as the baby boom generation joins the
Social Security rolls, that was the money that we had the
option of putting into a privatization proposal that could have
worked.
Politically, I don't think you can do any of these
proposals without that infusion of general revenue money, and
that is my problem with these proposals. By the actions that
the Congress took over the last 2 years, I think we have
precluded that option, particularly the actions that we have
just taken the last couple of weeks to make permanent all of
these rate cuts in the estate tax cuts.
So I would like to hear your response to that.
Mr. Walker. Well, as you know, Mr. Moran, I am not going to
get into the business of whether or not tax cuts are a good or
bad idea.
Mr. Moran. Well, in the context of the money we need to
make this work.
Mr. Walker. I can provide some information. If you look at
where we are today versus where we were a year ago there are at
least three contributing factors. One, the economy is weaker
than it was projected to be. No. 2, revenues are lower in part
due to the economy and in part due to tax changes and stock
market declining. Finally, expenditures are greater partly in
response to the tragic events of September 11. So if you look
at the combined effect of all of those, what was projected
which was going to be a significant excess of funds that would
be available to fund a transition obligation, to pay down debt
held by the public or some combination thereof, is largely
gone.
But that still doesn't mean that we shouldn't be engaging
in a fundamental debate about how this system should be
reformed and whether or not from an economic standpoint, not
from a budget scoring standpoint, but from an economic
standpoint, using discounted present value analyses and all,
what makes the most sense for how you end up reforming this
program over time.
One of the real concerns that I have, Mr. Moran, is the way
that our budget rules work is they are largely cash-flow based
and they are based on a 10-year horizon. And so I think some of
the things we need to be thinking about are, how can we bring
additional metrics to bear. How can we bring longer range
horizons to bear and how can we consider other options that
could cause you to reach different solutions as to what the
right thing to do is? You need another set of metrics to be
able to consider the long range implications of different
alternative actions rather than just the implications over the
next 10 years.
Mr. Moran. I don't want to be argumentative with you and I
don't have any problems with you or your judgment nor with Mr.
Crippen's, and I know we are going to hear from Mr. Steuerle
and I am anxious to hear from him, representing the Urban
Institute, and he was a member of the Commission. But I am
going to ask the same question of everyone. But when you say
even longer term, I don't know how far out you are going unless
it is 2030 or something like that. But even at that with these
lower revenue flows, given the reduction of the work force, not
just in quantity, but in quality, a much higher proportion of
our work force is non-native born, and nothing wrong with being
nonnative born, but less likely to have the benefits of a
quality education and as a result probably less capable of the
value-added productivity that gives us the growth.
So I am afraid we have set in motion a situation where we
are always going to be too strapped to achieve the kind of
transition that I agree in the long run makes sense. I
appreciate your response and I know that you don't want to get
into the tax cut itself, but I do think that has the most
relevance to the option the Congress has before it.
But I won't belabor the point and I thank you, Mr.
Chairman.
Mr. Hastings. Thank you.
Mr. Moran. Did Mr. Walker want to respond?
Mr. Walker. I would commend to you, Mr. Moran, a couple of
the charts that are in the testimony and that we showed, one of
which is how the composition of spending has changed as well as
what our simulation shows for the long range budget outlook,
which underscores some of the concerns you have. But I would
also come back and say that shows that we need to start dealing
with some of these problems sooner than later because the
longer we wait the tougher it is going to be and the more
dramatic the changes are going to have to be.
And your comment about the workforce is very relevant. We
have now moved into a knowledge-based economy. With a
knowledge-based economy it is people and brain power that make
the difference in connection with ours competitive advantage.
So things like education and things like other skills and
knowledge are going to be key to help fuel economic growth,
enhance productivity and help us deal with these longer range
problems.
Mr. Moran. There was a scientific study that came out
confirms that it was directed primarily at third world
countries, but they said it applies equally to the United
States, that investments in education and health care create
economic growth in themselves to a greater extent than the
reverse economic growth creating greater investments in
education and health care. They find that the former is an even
stronger impetus than the latter. And I am concerned that we
are not going to have much money to invest in nondefense
discretionary domestic programs.
But with that, thank you Mr. Walker, and thank you Mr.
Chairman.
Mr. Hastings. Mr. Bentsen wanted to have a follow-up
question. But I wanted to ask one very direct question in line
of the question with the gentleman from Virginia, and that is
this: Did the tax relief plan that we passed have a direct
relationship--negative or positive--on the Social Security
trust fund?
Mr. Walker. On the Social Security trust fund itself, no,
because the Social Security trust fund obviously just deals
primarily with payroll tax revenue.
Mr. Hastings. Has the tax relief plan that we passed had a
positive or negative effect on any benefits that anybody is
receiving?
Mr. Walker. Not at the present time, no.
Mr. Hastings. Thank you. Mr. Bentsen.
Mr. Bentsen. Thank you, Mr. Chairman. Mr. Toomey in his
line of questioning and your response talked about, if we go to
privatization, individual account, prefunded program, although
I don't know that prefunded is the right term, but we would--he
alluded that in effect future retirees would be held harmless
or perhaps even better off. You responded ``well, of course you
have transition costs that have to be accounted for and you
have other issues that have to be accounted for.'' And Mr.
Toomey--and I don't want to characterize his comments,
particularly with him not being here, he said ``fine, well, let
us lay off the transition costs.'' Assume those are absorbed
over a period of time. And if you make that assumption, I think
you still said, and what I would like you to do is clarify for
us, that there are other costs associated with this. One are
the administrative costs that you talked about, but are you
also stating that--and this is a perception that is out there
that needs to be clarified, the more--that whatever Congress
does with Social Security needs to be addressed because there
is an argument being made that well, if you stick with the
current defined benefit system through the trust fund, you are
either going to have to raise payroll taxes, cut benefits,
increase debt substantially or a combination thereof. But if
you go to a privatized account you can make a one-for-one
transfer and in fact you may well be better off.
Isn't it true you are just as likely to be worse off than
better off? And we get into discussions about return on
investment. And if you look at Treasury return versus an S&P
index return, the S&P index is always better, which of course
is not true, because for the last 2 years the S&P has been
below the Treasury return. So my question is, what are the
other--are you stating that you would have to go through a
wholesale benefit plan change, which very likely could result
in no longer a guaranteed minimum benefit or a benefit
reduction of some sort?
Mr. Walker. It obviously depends on the assumptions. Let me
give you a specific example. As you know, the President's
Commission's proposals that we are analyzing involve the
creation of an individual account element under the current
system. But in order to achieve sustainable solvency over time,
they propose certain other changes to the benefit structure of
the current defined benefit system. One of the proposals
proposes to index benefits based upon cost of living rather
than wages, which is a change. The other proposal talks about
indexing benefits based upon longevity and makes certain other
adjustments. This comes back to the point that I made before.
When you are comparing Social Security reform proposals, I
think to be fair you have to look at how does that reform
proposal compare against not just promised benefits, but also
funded benefits, because a lot of the promised benefits have
not been funded. So what is going to happen when you have run
out of money?
Mr. Bentsen. With the chairman's indulgence, one, the
change in the indexing would apply not to just Social Security
benefits but benefits under the new privatized program?
Mr. Walker. Defined benefit portion.
Mr. Bentsen. Of the non-cut, 10 percent.
Mr. Walker. Right.
Mr. Bentsen. But there would be a reduction in using a new
indexing method?
Mr. Walker. In other words, they would receive less money
under the defined benefit program than otherwise they would
have as is currently promised. But not all of those promises
are funded, but in addition to that, they would receive an
individual account that would earn a rate of return.
Mr. Bentsen. I think it is very important and I am glad you
are making this--the other point is whether we should look at
this in comparison to funded benefits, not in relation to
promised benefits because funded benefits are far below--it is
an unfunded liability, because a lot of times in the debate
over this issue advocates of individual accounts and
privatization make the assumption or the argument that we are
replacing promised benefits with a new promise that will be
fulfilled, and that is not necessarily accurate. I mean the
magic of compounding interest is there, but it is not always
there.
Mr. Walker. I think to be fair and balanced about it, you
have to look at the proposal against the criteria that we
established and you have to consider both funded benefits as
well as promised benefits. If you don't do that, you are
effectively assuming either a tax increase or a general revenue
infusion or a benefit cut that may or may not happen. Now under
the current system under current law, you can only pay Social
Security benefits to the extent that you have got assets in the
trust fund. So therefore, if you waited until 2041 when all the
bonds were gone, unless there was a change in the law that
would allow for additional revenue infusion, general revenues
or whatever else, you couldn't pay all the benefits.
Mr. Bentsen. What you are saying is whether you keep the
current system the way it is or you change it or you privatize
it or whatever you do, these changes are coming. So anyone who
is making the assumption that there is a magic fix out there
that can give you what you have today and even more in the
future does not exist except for a huge cost on the economy?
Mr. Walker. I don't think many Americans are assuming that
there aren't going to be changes that won't affect their future
benefits. I am talking about baby boomers and generation Xers.
I don't know very many boomers or generation Xers that don't
think there is going to be a significant change to this program
that will affect them. What is important is that people that
are currently retired and are nearing retirement, I would argue
it wouldn't be fair to change the deal for them because they
don't have time to make adjustments. Obviously you get elected
and I don't, so you have to make these decisions, but there are
obviously political problems with changing promises for people
who don't have time to make adjustments.
Mr. Bentsen. Thank you. Thank you, Mr. Chairman.
Mr. Hastings. Mr. Walker, thank you very much for your
testimony. If it wasn't already done, without objection, your
full report will appear in the record. And I appreciate very
much your candor and your work on this and we will dismiss you.
Mr. Walker. Thank you very much.
Mr. Hastings. Next we will hear from three experts who have
a great deal of knowledge of the annual report of the Social
Security trustees. First will be Mr. Gene Steuerle, who is a
Senior Fellow at the Urban Institute; Maya MacGuineas, Senior
Fellow at the New America Foundation; and third and certainly
not least, a former colleague of ours, Barbara Kennelly, who is
currently the President of the National Committee to Preserve
Social Security and Medicare.
I want to thank all of you for appearing here today, and
why don't we just go--without objection, your full statements
will appear in the record. Let me recognize first Mr. Steuerle.
STATEMENTS OF C. EUGENE STEUERLE, SENIOR FELLOW, THE URBAN
INSTITUTE; MAYA C. MACGUINEAS, SENIOR FELLOW, NEW AMERICA
FOUNDATION; AND THE HON. BARBARA B. KENNELLY, PRESIDENT,
NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE
STATEMENT OF C. EUGENE STEUERLE
Mr. Steuerle. Thank you, Mr. Chairman and members of the
committee. It is indeed a privilege to testify before you today
on the trustees' report on Social Security. And let me mention
also that I am an admirer of both of my colleagues, one of whom
I used to testify before, so it is nice to testify with her. My
testimony will assess several points which I will only
summarize here.
The integrity of the process leading to the trustees'
report is indeed a national asset. There is a question that
arises as to why we make projections for 75 years, and the
simple answer is we make projections for that long because past
Congresses and Presidents have essentially built internal
growth into these programs, and one simply has to account for
what one is promising.
Now when it comes to Social Security, another question that
arises is what are the key dates we want to emphasize. I would
argue that the key dates are today and 2008, when the baby
boomers start retiring. The main economic issue, as opposed to
an accounting issue, is that programs for the elderly and near
elderly are absorbing ever increasing portions of the national
income and of the Federal budget, and when they absorb more of
these resources, that burden has to be paid for.
The fundamental new long-term problem facing Social
Security is a rapidly declining number of workers relative to
beneficiaries, and it is a mistake to believe that this labor
market problem is going to be easily solved by any capital
market solution, whether we are talking about trust funds or
individual accounts. Scheduled declines in the Nation's
employment rate affect the affordability of Social Security not
simply through Social Security taxes and benefits, which is
what the trust funds measure, but also because the declining
number of workers reduces income taxes, it reduces national
output, and it reduces the private assets and income of the
elderly as well.
Now there are several other items that are in my report
that I am only going to very briefly summarize and I believe
need to be highlighted. One is that Social Security continues
to provide smaller and smaller shares of total benefits to
those people who are most needy; that is, those people who are
most elderly. The tables showing annual benefit levels need to
take into account lifetime, not just annual benefits, which for
Social Security and Medicare are now approaching for younger
couples about $1 million in current dollars in terms of their
value. The disability insurance program is often forgotten, and
yet it is showing increasing prevalence of disability insurance
receipts even while we have improved health care. And this
program also has widely disparate payments according to
geographic location. Social Security and Medicare already
depend a good deal on general revenue financing.
My final additional point is the uncertainty of
projections, which we often debate but pay little attention to,
is something that is amenable to reform, for instance, by
having years of benefit receipts simply indexed for how long
people are living.
Having given that summary, let me go quickly through the
main points. The public policy process behind the issuance of
the trustees' report is one of the most balanced and non-
partisan in this Nation. This achievement is made possible by
the involvement of a variety of institutions and individuals. I
was fortunate enough to participate in two technical panels and
to Chair one of them.
Let me also mention the national asset that is involved in
the integrity of the Office of the Actuary of the Social
Security Administration. Now there are some who question why
this process leads to projections for 75 years, given that many
factors are hard to estimate for so long a period of time. The
most obvious answer is that we project for so long because past
Congresses and Presidents have made promises for so long,
indeed for centuries into the future. As members of this Budget
Committee, you are well aware that this can be contrasted with
what we do on the discretionary side of the budget, where
promises are generally made for 1 year only. Making promises
that can only be met uncertainly in the far distant future
requires projections that have a great deal of uncertainty.
Now from an economic perspective the key Social Security
issue facing the Nation is what share of the Nation's economic
resources are demanded by programs for the elderly. If that
share goes up, then mathematically some other share must go
down. Someone must pay. In terms of the elderly share it has
been going up for some time and it is projected to continue for
a considerable period of time. That is shown in figure 1 in my
testimony. Of course the rate of increase for the elderly share
begins to accelerate once the baby boomers begin to retire in
2008. Many of the dates in the trustees' report are mainly key
points, markers, or signposts along that path.
Now built-in growth in particular programs act as a serious
impediment to shifting resources to meet other new needs and
priorities, whether that is education or reinvigoration of our
foreign policy in defense of freedom. But I also want to note
that it also deters us from fixing up the programs themselves,
such as to additional aid those who have significant
impairments in old age, to provide a drug benefit--which you
have already discussed--or to remove some of the very strong
discrimination in Social Security against single working heads
of households. I discuss this discrimination in my testimony,
but I will not go into the details here.
Even the budget debates in Congress this year prove how the
pressure of these growing entitlement programs affect
discretionary choices. These issues are not postponed until
some year like 2017.
Now several times I have mentioned the labor market
problem. Social Security faces a significant labor market
problem that is hidden in trust fund accounting. Indeed, too
much emphasis on the trust funds implies that there is some
sort of capital market solution to this issue. Simply put, it
is the scheduled decline in the number of workers to retirees
that forms the core of the new dilemma facing Social Security.
The typical worker now fully retires in late middle age, at
least if we define old age and middle age by life expectancy.
When he does so, our current Federal programs encourage him to
become dependent upon other taxpayers because we have a pay-as-
you-go system. His drop in output reduces the amount of
transfers that is making to support government programs, but it
is not just Social Security that he no longer finances, it is
also other programs that he used to finance through Federal
income and other State and local taxes. Meanwhile his own
after-tax income falls, the rate of growth of GDP falls, and it
is this multiple hit that affects the Social Security and
Medicare affordability.
The United States was lucky in the post-World War II
period. Despite substantial decreases in the male labor force
participation as males acquired more and more years of
retirement, females entered the labor force in increasing
numbers. So if you look at the numbers on the employment rate
that is a later graph in my testimony, you will see that the
adult employment rate actually increased over this post-World
War II period and is scheduled to decline quite rapidly. In
fact, the rate of decline, assuming there is no adjustment in
this labor market behavior, is so strong and so long that it is
equivalent to an increase in the unemployment rate of just
short of one-half of 1 percent of the labor force every year
for almost 20 years running. And we have not had that type of
labor market hit since the time of the Great Depression.
Now, as I mentioned, I have several other issues in my
report but there is no time to discuss them here in depth. So I
would just give one or two sentences on each one.
First, the program is now designed to provide continually
higher and higher levels of benefits to those further and
further from likely death. I don't believe that is necessarily
a good way to have a program adjust over time.
Second, the expected value of lifetime benefits reveals
much more about the program and much more about what needs to
be reformed than annual benefits. As I mentioned, these
lifetime benefits have climbed from about $290,000 for an
average income couple in 1970 to close to $540,000 today and to
nearly a million dollars for a couple retiring in 2030.
Third, prevalence rates of disability insurance coverage
are actually expected to grow in a population that is growing
more healthy over time. Meanwhile, there are vast geographical
differences in the incidence and prevalence of DI receipts, and
these issues need attention as well.
Fourth, Social Security and Medicare depend already to a
significant extent on general revenues, and these need to be
highlighted, I believe, better in the trustees' reports.
And finally, the trustees' reports do not make clear that
the uncertainty of projections is itself an item that can be
reformed through the process itself. The most obvious example
is that these predictions are uncertain in part because we
don't know how long people will live in the future. If we
simply index the program for life expectancy, we can remove
this source of uncertainty in the program. There are countries
like Sweden that have also reduced the uncertainty in
projections by adjusting their systems not simply for life
expectancy but even for fertility rates and the amount of taxes
that will be available in the future.
In summary, the process leading to the development of the
trustees' reports is one of the finest in government. Here I
have emphasized that the key economic dates coming out of the
report are today and 2008, when the baby boomers begin to
retire, basically any date when the programs for the elderly
are growing and taking an increased share of national income
out of the budget. I have also suggested that Social Security
funding problems relate primarily to a remarkable drop in labor
force participation, and the trust fund accounting tends to
hide that problem.
Various aspects of the Social Security program could also
be better clarified in the trustees' reports: How increasing
shares of total benefits are being spent on those who are
younger and with less relative needs; how growth in cost is
better reflected in lifetime than annual benefits; how
prevalence rates in disability insurance are growing but are
masked by the way they are reported today; how much these
programs are scheduled to be supported by general revenues over
time; and finally, how the uncertainty of actuarial estimates
can actually be reduced through policy design.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Steuerle follows:]
Prepared Statement of C. Eugene Steuerle, Senior Fellow, the Urban
Institute, Former Chair, Social Security Technical Panel on Methods and
Assumptions, President of the National Tax Association
Mr. Chairman and members of the committee, it is privilege to
testify before you today on the Trustees' Report on Social Security.
Through the various Social Security and Medicare Trustees' Reports we
gain a fuller understanding of the long-run costs and benefits
reflected in the current design of these programs. My testimony will
emphasize several basic points:
<bullet> The integrity of the process leading to the Trustees'
Report--including the input of the highly respected Office of the Chief
Actuary--is a national asset. The report must contain projections for
75 years or longer because past Congresses and Presidents have built
eternal growth into these programs, and one should try to account for
what one is promising.
<bullet> When it comes to Social Security, the key dates that one
should emphasize are today and 2008, when the baby boomers start
retiring. The main economic issue is that programs for the elderly and
near-elderly continue to absorb increasing portions of the Nation's
output and of the Federal budget, which necessarily means that other
portions are already being reduced, soon at ever faster rates.
<bullet> The fundamental new long-term problem facing Social
Security is a rapidly declining number of workers relative to
beneficiaries, and it is a mistake to believe that this labor market
problem can easily be solved by a capital market solution. Scheduled
declines in the Nation's employment rate affect the affordability of
Social Security not simply through increases in Social Security
benefits and declines in Social Security taxes (a ``trust fund''
concept), but through declines in national output, income tax
collections, and the private assets and income of the elderly, as well.
There are several additional items that I believe are worthy of
highlighting within the Trustees' Reports:
<bullet> That Social Security continues to schedule smaller and
smaller shares of benefits to those with greater needs, such as people
near poverty and the truly old (say, those with less than 10 years of
life expectancy);
<bullet> That tables showing annual benefit levels tend to disguise
the promised growth in lifetime benefits under Social Security and
Medicare, which are approaching $1 million for younger couples today;
<bullet> That the Disability Insurance program projections imply
increasing prevalence of disability insurance receipt in most age
groups in a program with widely disparate payments according to
geographic location;
<bullet> That Social Security and Medicare already depend a good
deal upon general revenue financing, largely through transfers of
income taxes collected on Social Security benefits, through the
financing of Part B, Medicare, and through future interest payments;
<bullet> That the uncertainty of projections is a consequence of
program design, such as the failure simply to adjust years of benefit
receipt by changes in life expectancy.
the process
The public policy process behind the issuance of the Trustees'
Report is one of the most balanced and nonpartisan in this Nation. The
achievement is made possible by the involvement of a variety of
individuals and institutions: trustees from the Cabinet, outside
``public'' trustees, and departmental staffs, such as the Office of
Economic Policy within the Treasury Department. Special note should be
made of the long-standing reputation for integrity of the Office of the
Chief Actuary of the Social Security Administration (SSA). I have also
been privileged to participate in two technical panels, one of which I
Chaired. These panels are invited by SSA to provide an external review
of its methods and assumptions--a process now called by the Social
Security Advisory Board and in which SSA cooperates fully.
There are some who question why projections are made for 75 years
when certain factors are very hard to predict for such a long period of
time. The first answer is the most obvious one: we project for that
long because past Congresses and Presidents have made promises for so
long--indeed for centuries--into the future. This can be contrasted
with the discretionary side of the budget, where promises are generally
made for 1 year only. Making promises that can only meet uncertainly in
the far distant future requires projections filled with uncertainty,
not the other way around. Second, we do know a fair amount about the
future since birth rates today affect such matters as the maximum
number of non-foreign born 50-year-olds who will be alive in 50 years
or 75-year olds alive in 75 years. Some of these demographic factors
can be projected with a modest degree of certainty for well into the
future.
key dates
From an economic perspective, the key ``Social Security'' issue
facing the Nation is what share of the Nation's economic resources are
demanded by programs for the elderly. If that share goes up, then
mathematically some other share or sets of shares must decline. It
turns out that the elderly share has been going up for several decades
and is projected to continue along that path even today (figure 1).
When the elderly share of the budget was much smaller, it put less
pressure on other parts of the budget. Now that the share is more than
half of all non-interest domestic spending and growing, the pressure on
other programs is rising. Of course, the rate of increase in the
elderly share begins to accelerate once the baby boomers start retiring
in 2008.
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Many of the dates in the Trustees' Reports are mainly signposts
along this path and have no great meaning relative to the path itself.
Some have meaning for individuals--such as 2043 when current law
requires a reduction of more than one-quarter in annual Social Security
benefit payments to all retirees then alive.
Built-in growth in particular programs acts as a serious impediment
to shifting resources to new needs or priorities, whether it be
education or reinvigoration of our foreign policy in defense of
freedom. But it also largely deters a shifting of resources within
elderly programs themselves, such as to help those with significant
impairments because of old age, to provide a drug benefit, or to remove
some of the clear discrimination in Social Security against single
working heads of household--who may work, pay taxes, and raise
children, and yet get lower benefits than other beneficiaries who do
none of these activities. These are issues for today, not just decades
into the future. Even the budget debates in Congress this year prove
how the pressure of these automatically growing entitlement programs
affects discretionary choices. The issues aren't postponed until some
year like 2017.
the labor market problem
Social Security faces a significant labor market problem that is
somewhat hidden in trust fund accounting. Indeed, too much emphasis on
``trust funds'' implies that that there is some sort of capital market
solution. Simply put, it is the scheduled decline in the number of
workers to retirees that forms the core of the new dilemma facing
Social Security.
Now it is true that our mandated retirement system--unfortunately
in my view--has always had only very modest funding or saving levels
relative to potential liabilities. This has led to a worthy debate both
about saving the temporary and relatively small surpluses now being
generated on a cash flow (but not liability) basis or trying to put
more money aside in individual accounts or in the trust funds. But,
quite bluntly, the adoption of dozens of saving incentives over the
past few decades has shown that the government of a free society has
trouble mandating net increases in national saving rates, since private
individuals may with one hand offset what the government does or
requires them to do with their other hand.
The typical worker now fully retires in late middle age--at least
if old age and middle age are defined by life expectancy. When he does
so, our current Federal programs encourage him to become dependent upon
other taxpayers. His drop in output reduces the amount of transfers he
is making to support government through Social Security taxes, Federal
income taxes, and other taxes, including those paid to State and local
governments. In addition, his own after-tax income falls, thus reducing
the amount of earnings he has to spend that year or to put aside to
support himself more in later years (see example in figure 2). It is
this multiple hit that so dramatically affects the affordability of
Social Security and Medicare.
The United States was lucky in the post-World War II era. Despite
substantial decreases in male labor force participation due to more and
more years in retirement, females entered the labor force in such
numbers that the employment rate among adults still increased. If no
adjustments in retirement behavior are made, however, this Nation faces
the reverse situation--a decline in the percentage of adults employed
along with an increase in the percentage of those more dependent upon
government. The potential scheduled decline in the employment rate is
so strong and so long that it is equivalent to an increase in the
unemployment rate of about 0.4 percentage points per year every year
for over two decades running (see figure 3).
other issues
Serving the Less Needy. The Social Security Trustees report is
mainly focused on whether assets and liabilities of the system come
into balance. However, it does contain some data on projected benefit
levels for workers and couples at different income levels. These data
tend to show some aspects of the distribution of benefits but mask a
number of potential problems and inequities in the program. In
particular, the program as now designed continually provides higher and
higher percentages of benefits to those further and further from likely
death (see figure 4). The antipoverty effectiveness of each additional
dollar spent is declining.
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The system also strongly discriminates against divorced and
unmarried individuals, many of whom work, pay taxes, and raise children
by themselves, yet in the end get fewer benefits than individuals who
do none of these. The discrimination is caused by the design of spousal
and survivor benefits, which are available for no additional tax
contributions but only to certain individuals (those who remain married
to a worker for more than 10 years). Another problem caused by this
same structural design of spousal and survivor benefits is that smaller
levels of benefits are provided for two-earner couples than for one-
earner couples with the same amounts of earnings and taxes paid into
Social Security.
Lifetime benefits. The Trustees' Reports have traditionally shown
the value of annual Social Security benefits over time. However, a
large share of the growing costs of Social Security (as well as
Medicare) has come from an expansion in the number of years of benefit
support. The expected value of lifetime benefits conveys much more
about the nature of Social Security promises being made than do annual
benefits, and I--along with the technical panel I chaired--have
recommended inclusion of these amounts in the Trustees' Reports. These
lifetime benefits have climbed from about $290,000 for an average-
income couple retiring in 1960 to about $650,000 today and are
scheduled to grow to over $1 million for an average-income couple
retiring in 2030 (figure 5).
An additional reason for showing these lifetime figures is that
policy makers considering reform should focus considerable attention on
what type of package of benefits they want to provide for the future,
not just on individual pieces of a package. A benefit of $25,000 a year
for 20 years, for instance, might provide more protection against
poverty than a benefit package of $20,000 a year for 25 years, even if
the lifetime cost is the same.
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Directions for Disability Insurance (DI). Almost all the recent
public attention to OASDI is on the old age or OASI part of the
program. However, the Trustees' Report on OASDI does cover DI, and it
demonstrates, among other things, the incidence levels of disability
insurance. Incidence levels reflect mainly the number of new recipients
added per year to the system, and these projections tend to show a
leveling out in the program for numbers of new beneficiaries. However,
this can be misleading, as can be understood theoretically by thinking
about moving from 99 percent to 100 percent of the population being
covered. Upon hitting 100 percent, the incidence rate would show a
decline to zero, but the program clearly would not be declining in cost
or in percentage of the population covered. In other words, the
incidence of new recipients must be added to the stock of people who
remain in the program to figure out the prevalence of DI within the
population. A steady incidence rate can mean a growing stock or
prevalence rate.
The Social Security Administration calculates prevalence--the
percentage of the population of different ages who receive DI (figure
6)--but it doesn't show these figures in the Trustees' Reports. These
prevalence rates are projected to grow in most age groups even while
health care improves. That age-adjusted prevalence rates of disability
insurance go up over time even while there is no projected increase in
age-adjusted prevalence of actual disability implies either that people
today are being under-served or people tomorrow are being over-served.
These difficulties within DI, as well as the wide geographical
differences in incidence and prevalence of DI recently brought to light
by the Social Security Advisory Board, imply that serious thinking
needs to be applied to this program as well.
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Dependence Upon All Revenue Sources. One issue often debated with
Social Security and other elderly programs is whether they are adding
to net saving or not. Although the answer is unclear, any potential
savings of these programs are reduced substantially by the general
revenue sources that they already tap. Other than interest payments,
the largest among these are those that derive from the income taxation
of Social Security benefits and the general revenue financing of the
Supplementary Medical Insurance (SMI) program (figure 7).
Interest payments to Social Security also essentially come out of
general revenues. The trust fund concept tends to hide the nature of
all these general revenue obligations, although the reports do show the
figures in separate tables on income and cost. The total effect should
be shown together in a separate table, perhaps following along the
lines of presentation of general revenue effects already in the HI and
SMI report. After all, the more that comes out of general revenues, the
less that such revenues are available for other societal needs and
obligations.
One can graphically display the dependence of Social Security and
Medicare on all tax sources. Figure 1 shows the demands of Social
Security and Medicare over time. Of course, if all obligations in
elderly programs were to be counted, we would also add in Medicaid
(long-term care) and civil service and military retirement systems.
These elderly programs as a whole are essentially scheduled to absorb
almost all taxes, which remain relatively constant as a percentage of
national income.
The Uncertainty of Projections. Commendably, SSA calculates
projections not only for some average or intermediate set of
circumstances but for various alternatives as well. Following upon the
advice of several groups, including the Technical Panel which I
chaired, SSA is investigating ways to improve upon its measures of the
risk that the system will do worse or better than projected.
As currently presented, however, policy makers who focus almost
entirely on intermediate projections ignore most of this analysis. What
the Trustees' Reports do not make clear is that these risks and
uncertainties about future imbalances are a consequence of program
design. Therefore, they can largely be built out of the program. For
instance, there is significant risk that people will live longer (or
shorter) lives than projected and the system will be further out of (or
in) balance than projected. But there is no reason this financial risk
has to be in the program. If the program were ``indexed'' so that as
people lived longer, they did not receive more years of benefits, then
that additional ``risk'' of imbalance would be eliminated (figure 8).
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Similarly, it is possible to adjust the system over time so that it
pays out benefits according to the number of workers and taxpayers in
the economy, which itself is affected by demographic and economic
factors such as the fertility rate. Sweden recently enacted a sweeping
reform that makes that type of adjustment so that the risk of long-term
imbalance is significantly reduced, if not eliminated, for a whole
variety of demographic and economic factors.
By the way, the current Social Security system already is
essentially adjusted for changes in economic growth levels. For
instance, when the rate of wage growth declines, then so does the rate
of future benefits--which is why the sensitivity of the system to
changes in economic assumptions is not great (see p. 151 of the 2002
OASDI Trustees' Report). On the flip side, when wages increase
unexpectedly, so do future benefits. It turns out that if unexpected
growth in wages in the last part of the 1990s hadn't been allowed to
raise substantially the level of future benefits promised to such
people as those of us sitting in this room today, then the long-run
actuarial deficit of Social Security would have been cut almost in
half. Thus, Social Security could have shared in the same budgetary
gains that in the late 1990s created substantial slack in the non-
entitlement part of the budget.
summary
The process leading to the development of the Trustees' Reports is
one of the finest in government. That individuals like myself are able
to make recommendations on improvements speaks well of the process
itself. Here I have emphasized that the key economic dates coming out
of the reports are today and 2008, when the baby boomers begin to
retire--basically any dates when the programs for the elderly as a
whole force reduced shares of national income to be spent on other
items. I have also suggested that Social Security funding problems
relate primarily to a remarkable scheduled drop in labor force
participation, and trust fund accounting tends to hint a bit
misleadingly that this problem can be met by a capital market solution.
Various aspects of Social Security programs could also be better
clarified within the Trustees' Reports: how increasing shares of total
benefits are being spent on those who are younger and have less
relative needs, how growth in costs is better reflected in lifetime
than annual benefits, how prevalence rates of Disability Insurance are
growing but are masked by more constant ``incidence'' rates, how much
these programs are scheduled to be supported by general revenues over
time, and how the uncertainty of actuarial estimates can be reduced
through policy design.
Mr. Hastings. Thank you, Mr. Steuerle.
Ms. MacGuineas.
STATEMENT OF MAYA C. MACGUINEAS
Ms. MacGuineas. Good morning. My name is Maya MacGuineas,
and I am a Senior Fellow at the New America Foundation, a
nonpartisan think tank in Washington, where I work on fiscal
policy. Thank you for inviting me to testify. It is a privilege
to appear before the committee today.
I have been asked to talk about the trustees' report in
particular. The trustees' report is the single most important
and influential source of information about the financial
health of the Social Security programs. And given the attention
the report receives, it is certainly worthwhile to discuss not
only the implications of the findings, but whether there are
ways to improve either the content or the presentation.
Furthermore, given the unbiased analysis, the trustees'
report can and should provide a framework for comparing various
reform proposals as we move forward with the necessary
discussion about how best to reform Social Security.
In my comments today, I am going to discuss ways to provide
more information about Social Security's effect on the unified
budget, an analysis that extends beyond the actuarial window, a
more detailed breakout of the sensitivity analysis of various
economic and demographic assumptions and additional information
with regard to benefits.
The main purpose of the annual report is to shed light on
the overall financial health of Social Security, and the report
is unquestionably the most comprehensive source of such
unbiased information. In addition to evaluating short range
trust fund adequacy, the analysis relies primarily on five
measures, those being: trust fund exhaustion dates, income and
cost rates, trust fund ratios, actuarial balance and Social
Security as a percentage of GDP.
In my opinion, some of these are more useful than others.
Income and cost rate, for instance, are reasonably
straightforward. They show that benefits will exceed taxes as a
percentage of payroll by 6.42 percent at the end of the 75-year
period. Likewise, viewing Social Security as a percentage of
GDP is extremely useful because it shows the level of resources
the program will transfer across the entire economy, and this
transfer will grow from 4.5 percent today to 7 percent at the
end of the time period.
On the other hand, trust fund ratios, actuarial solvency
and exhaustion dates seem to cause as much confusion as they do
clarity. And while I do not take issue with the assumptions,
these numbers are based on, or the methodological approaches
used to derive them, I am concerned they may divert attention
away from some of the more relevant issues. The trust fund
ratio is expected to peak at 471 percent in 2015 and decline
thereafter. The trust fund exhaustion date is 2041. The
actuarial balance, which measures Social Security's financial
status over a 75-year time period and expressed as difference
between expected income and cost rates as a percentage of
taxable payroll in present value, is in a deficit of 1.87
percent.
These numbers, however, do not convey the full burden to
the budget or the economy of meeting future obligations, and
their inclusion of the trust funds, while appropriate in an
accounting sense, masks the extent of the larger problems. To
illustrate this point, you merely need to look at the idea that
has been floated occasionally to increase interest rates. Such
a change would improve trust fund ratios, extend exhaustion
dates and decreases the actuarial deficit. Increase the
interest rate by a fraction and the problem would improve.
Increase the interest rate by enough and it would appear on
paper to disappear completely.
Would we have really made any meaningful improvements in
the situation we are facing? Of course not. The overflowing
trust funds would not do a thing to make the task of paying
benefits any easier. The money to pay the higher interest cost
would have to come from somewhere, but neither trust fund
ratios, actuarial solvency or exhaustion dates reflect this.
So on to this table. One of the recommendations I do have
would be to include a year-by-year cash-flow analysis in the
report. This table shows it in 10 years, but I would suggest
that it be done for every year. Also this table is in 2002
dollars. One would want to include both current and constant
dollars. Such a cash-flow table would show the tax revenues
that will flow to the Social Security as well as their sources
and the annual costs. The surplus or deficit numbers I believe
are particularly helpful because they illustrate how much
Social Security contributes to the rest of the budget in the
short run and how much it will drain from the rest of the
budget in the future. It is also useful to view how these
deficits translate into payroll tax increases or benefit
reductions necessary to keep the program balanced.
In addition to showing the cash-flow numbers in dollars, I
suggest showing them as a share of total government revenues.
And by incorporating CBO assumptions one can see that spending
on Social Security will rise from 23 percent of the budget
today to 33 percent by 2025 and continues to rise thereafter.
The cash-flow deficit will grow to 6 percent of total revenues
over the time period and then double over the next 50 years.
While in my mind viewing these numbers as a share of the
budget is the most helpful, you could also calculate it as a
share of GDP or covered payroll or any other denominator deemed
appropriate.
I also in my written testimony include how this would be
helpful in improving the details that we receive on the
sensitivity analysis. The actuaries include this in Appendix D,
but they do so for only certain time periods. I think it would
be helpful to look at this on an annual basis, particularly
because reporting these results in a cash-flow framework would
be very useful in conveying both the timing and magnitude of
the effects and also, I think, clarifying some common
misconceptions such as the notion that we can actually grow our
way out of this problem without changes to the program or that
the financing challenges result solely from a demographic
bubble that we can weather with a few minor changes.
Furthermore, these cash-flow tables would be extremely
helpful in comparing and contrasting specific policy
recommendations. In evaluating the effect of increasing the
payroll tax cap, for instance, one could see how much the top
line, income from payroll tax, would increase. Similarly, this
analysis would convey the extent to which shifting from wage
indexing to price indexing would affect benefits over time.
And finally, proposals to create private accounts could
also be evaluated in the same manner. If a private account plan
specified revenue or benefit changes they would be reflected
above the line. To the extent the plan depended on general
revenue transfers, that would be reflected below the line and
shown as a share of the budget. Over time the money available
from the accounts would provide another source of income to be
added to revenue on top of the line.
In addition to cash-flow tables, I think there are a few
other changes that could be helpful, and I will speak to these
briefly. One, the concept of actuarial solvency is somewhat
confusing, both because it includes the trust funds as assets
without showing where the money to pay for them will come from
and, two, because it is calculated over a 75-year time period,
which can produce a ``cliff effect,'' where if you extend this
evaluation period for a single year, new policy changes are
necessary and the whole program again falls out of balance.
Arguably, I believe it would be better to show actuarial
solvency in perpetuity. Calculations reported in recent work by
Kent Smetters and Kevin Brennan of the University of
Pennsylvania have found that this would alter the calculation
of the present value of the unfunded liabilities from $3.3
trillion to $6 trillion.
Additionally, the trustees could consider including tables
that show both lifetime benefits and net transfers on a
generational basis. Gene spoke about lifetime benefits and gave
some examples of how dramatic it would be to see how these
benefits grow with life expectancies. Net transfers, the
present value of a generation's benefit less the taxes they
pay, would be useful at looking at the program from the
perspective of generational equity. We could, for instance,
make Social Security appear to be healthy by all evaluation
techniques, including cash-flow by simply passing a law that
the payroll tax would be increased as necessary to cover
promised benefits. The program would be actuarially solvent,
cash-flow deficits would be zero, and the trust fund would
never be depleted. But younger workers and future generations
would suffer huge losses which would be captured in a net
transfer evaluation while missed in other assessments.
To conclude, the integrity with which the trustees' report
is constructed and its unbiased content play a crucial role in
providing the information needed to evaluate the financial
health of Social Security. My suggestions here should in no way
be taken as a criticism of the work that is currently done but
rather a suggestion of other information that might be useful
for purposes of comparison and analysis.
[The prepared statement of Ms. MacGuineas follows:]
Prepared Statement of Maya C. MacGuineas, Senior Fellow, New America
Foundation
Good morning, Mr. Chairman and members of the committee. My name is
Maya MacGuineas and I am a Senior Fellow at the New America Foundation,
a nonpartisan think tank here in Washington, where I work on fiscal
policy. Thank you for inviting me to testify today. It is a privilege
to appear before the committee.
The Social Security Trustees' Report is the single most important
and influential source of information about the financial health of the
Old-Age and Survivors Insurance and Disability Insurance programs.
Given the attention the report receives, it is certainly worthwhile to
discuss not only the implications of the findings but also whether
there are ways to improve either the content or presentation.
Furthermore, given its unbiased analysis, the Trustees' Report can and
should provide a framework for comparing various proposals as we move
forward with the discussion about how best to reform Social Security.
In my comments today, I am going to discuss ways to provide more
information about Social Security's effects on the unified budget, an
analysis that extends beyond the actuarial window, a more detailed
breakout of the sensitivity analysis of various economic and
demographic assumptions, and some additional information with regard to
benefits.
The main purpose of the annual report is to shed light on the
overall financial health of the Old-Age and Survivors Insurance and
Disability Insurance programs. The Trustees' Report is unquestionably
the most comprehensive source of such information. In addition to
evaluating short-range trust fund adequacy, the analysis relies
primarily on five tools including: 1. Trust fund exhaustion dates; 2.
Income and cost rates; 3. Trust fund ratios; 4. Actuarial balance; and
5. Social Security costs as a percentage of GDP.
In my opinion, some of these are more useful than others. Income
and cost rates for instance, are reasonably straightforward and quite
useful. They show that while taxes as a percentage of payroll currently
exceed benefits by 1.88 percent of covered payroll, this relationship
will deteriorate over time and that by 2025, benefits will exceed non-
interest income by 2.90 percent. By 2080, the number will have grown to
6.68 percent. Likewise, viewing the Social Security program as a
percentage of GDP is an extremely useful tool because it shows the
level of resources the program will transfer across the entire economy.
The Trustees report that Social Security will transfer 7 percent of the
economy at the end of their 75-year valuation period as opposed to 4.5
percent today. Both of these sets of numbers are relatively easy to
understand.
On the other hand, trust fund ratios, actuarial solvency, and
exhaustion dates seem to cause at least as much confusion as clarity.
While I do not take issue with the assumptions these numbers are based
on, or the methodological approaches used to derive them, I am
concerned they may divert attention away from more relevant issues.
The trust fund ratio is expected to peak at 471 percent in 2015,
and decline thereafter. The trust fund exhaustion date, 2041, is the
year when the trust funds' assets will be depleted. Actuarial balance
measures Social Security's financial status over a 75-year time period,
expressed as the difference between the expected income and costs as a
percentage of taxable payroll in present value terms. Currently, the
actuarial deficit is 1.87 percent.
But these numbers do not convey the full burden to the budget or
the economy of meeting future obligations. Their inclusion of the trust
funds, while appropriate in an accounting sense, masks the extent of
the larger problem. One must also consider the burden the trust funds
represent in order to view the funding problem in its entirety. To
illustrate this point, you merely need to look at the idea that has
been floated occasionally to increase the rate of interest paid on the
bonds in the trust funds. Such a change would improve trust fund
ratios, extend the exhaustion date, and decrease the actuarial deficit.
Increase the interest rate by a fraction, and things would look a bit
better. Increase the rate by enough, and all problems would appear on
paper to evaporate. Would this change make any meaningful improvements
to the situation we are facing? Of course not. The overflowing trust
funds would not do a thing to make the task of paying benefits any
easier. The money to pay the higher interest costs would have to come
from somewhere, but neither trust fund ratios, actuarial solvency, or
exhaustion dates reflect this.
One recommendation I would make, then, is to include a year-by-year
cash flow analysis. Almost all of the information necessary for such an
analysis is contained in the Trustees' Report but could be combined in
a way that illuminates some important issues (See Table 1).
A cash flow presentation would lay out the tax revenues that will
flow to the program as well as their sources, and the annual costs. I
show the numbers here in 2002 dollars; if this format were adopted,
they would presumably be shown in both current and constant dollars.
The surplus or deficit numbers are particularly helpful because they
illustrate how much Social Security contributes to the rest of the
budget in the short run and how much it will drain from it in the
future. It is also useful to view how these deficits translate into
payroll tax increases or benefit reductions necessary to keep the
program balanced on an annual basis.
In additional to showing the cash flow numbers in dollars, I would
suggest showing them as a share of total government revenue. Since the
government's actual tax base is only a little more than half the value
of GDP, showing cash flow numbers as a share of total government
revenue gives a more realistic picture of the tax rates required to
achieve balance. By incorporating Congressional Budget Office
assumptions, one can see that spending on Social Security will rise
from 23 percent of the budget today to 33 percent by 2025 and continues
to rise thereafter. The cash flow deficit will grow to 6 percent as a
share of total revenues over that time period and then double over the
next fifty years. While in my mind viewing these numbers as a share of
the budget is most helpful, they could also be calculated as a share of
GDP, covered payroll, or any other denominator deemed appropriate.
This format would not only be helpful in viewing trends in a way
that is relevant to Social Security and the unified budget, it could
also serve as a useful benchmark for comparing the effects that changes
in assumptions or policies would have on the program. For instance, the
Trustees include in their report high, low and intermediary cost
assumptions for their underlying economic and demographic assumptions.
In Appendix D of the report they perform a sensitivity analysis by
altering one variable at a time. The findings are reported in terms of
summarized income and cost rates and actuarial balance over 25, 50, and
75-year periods. Reporting these results using the annual cash flow
framework would be more useful in conveying the timing and magnitude of
these effects. This analysis would be helpful in clarifying some
misconceptions, such as the notion that we can grow our way out of the
problem without other changes to the program, or that the financing
challenges result solely from a demographic bubble that we can weather
with a few minor changes.
Furthermore, cash flow tables would be extremely helpful when
comparing and contrasting specific policy recommendations. In
evaluating the effect of increasing the payroll tax cap, for instance,
one could see by how much the top line--income from payroll tax--would
increase. Similarly, this analysis would convey the extent to which
shifting from wage indexing to price indexing would affect benefits
over time. Proposals to create private accounts could be evaluated in
the same manner. If a private account plan specified revenue or benefit
changes, they would be reflected above the line and to the extent a
plan depended on general revenue transfers, that would be reflected
below the line and shown as a share of the budget. Over time, the money
available from the accounts would provide another source of income to
be added to tax revenue.
In addition to adding cash flow tables, there are a few other
changes that would be helpful. First, actuarial solvency is somewhat
confusing not only because it takes into account the Social Security
trust funds while ignoring where those funds will come from, but also
because it is evaluated over a 75-year period. This focuses attention
on policy changes necessary to keep the program balanced over that
period and that period only. This approach to reform suffers from the
problem of the ``cliff effect'' where when the evaluation period is
lengthened by a single year, the program promptly falls out of balance,
thus making further changes necessary. It would arguably be better to
evaluate the program's well being in perpetuity, shifting attention
away from actuarial solvency over a limited time period to
sustainability--a far more important objective. Calculations reported
in recent work by Kent Smetters and Kevin Brennan show that the
actuarial shortfall is twice as large when evaluated in perpetuity. In
particular, the shortfall increases from around $3.3 trillion over the
next 75 years to over $6 trillion when evaluated in perpetuity.
Finally, the Trustees should consider including tables that show
both lifetime benefits and net transfers on a generational basis.
Lifetime benefits rather than average annual benefits would be helpful
in reflecting how costs rise along with increases in life expectancies.
Net transfers--the present value of a generation's benefits less
the taxes they pay--would be useful in evaluating generational equity.
Smetters and Brennan show that this measure gives a more objective view
of liabilities than standard trust fund accounting.* We could, for
instance, make Social Security appear to be healthy by all evaluation
techniques including cash flow by simply passing a law that the payroll
tax would be increased as necessary to cover promised benefits. The
program would be actuarially solvent, cash flow deficits would be zero,
and the trust fund would never dip below zero. But younger workers and
future generations would suffer huge losses, which would be captured in
a net transfer evaluation while missed in other assessments.
---------------------------------------------------------------------------
*Note.--See, Smetters, Kent and Kevin Brennan. ``Analyzing Social
Security Reform on a Cohort Basis: Toward Objective Accounting.''
University of Pennsylvania, Manuscript, Forthcoming.
---------------------------------------------------------------------------
To conclude, the integrity with which the Trustees' Report is
constructed and its unbiased content play a crucial role in providing
the information needed to evaluate the financial health of Social
Security. My suggestions here should in no way be taken as a criticism
of the work that is currently done, but rather as suggestions about
other information that might be useful for the purposes of analysis and
comparison. I look forward to your questions, and once again, thank you
for holding this hearing and inviting me to testify.
Mr. Hastings. Thank you very much for your testimony. And
now it is my pleasure to recognize our former colleague Barbara
Kennelly.
STATEMENT OF THE HON. BARBARA B. KENNELLY
Ms. Kennelly. Thank you, and as a former member of this
committee, I want to say to you that I know you are here, you
are the unsung heroes of Capitol Hill.
For nearly 70 years, Social Security has guaranteed working
families that they would have income in the event of old age,
death of a family wage earner, or a disability. Social Security
provides benefits in a manner that is both progressive and
fair. No other wage replacement program, public or private,
offers the protections of the Social Security old age, survivor
and disability insurance program. In addition to retirement
income, I want to emphasize this: that 38 percent of all Social
Security benefits are paid to the disabled individuals, spouses
of the disabled individuals or dependent children or survivors.
I emphasize that because of the earlier conversation that this
committee had with the previous witness. I don't know how many
of these people, this 38 percent, had low expectations of
having Social Security there for them, but I do know they
probably had no expectation that they would have an early death
or be disabled.
Today Social Security, as you know, continues to meet the
challenge that it faces and it still has a surplus. And even,
in fact, with the recent economic sluggishness, it continues to
keep that surplus. We know from the Social Security trustees'
report that we can probably expect full solvency until 2041. By
2017, Social Security will have accumulated over $5 trillion in
Treasury bonds backed by the full faith and credit of the
United States of America. And I think I can speak with
certainty that the millions of members of the national
committee certainly expect that these bonds can be collected
upon because they understand that is the law. In 2017, the
program will begin to call in its interest on these bonds.
Beginning in 2027, as we said often this morning, interest
and tax revenues combined will be insufficient to meet demands
and the program will need to redeem the bonds that we have been
talking about. In the year 2041, if no changes are made, the
trust fund will be exhausted and incoming revenues will meet
only about 72 percent of current benefit obligations. Even at
this point, Social Security isn't broken.
What is happening to Social Security is because of
longevity and because of low birth rates. It has a cash
shortfall, as has been mentioned. Benefit adjustments and/or
new revenues equivalent to 1.86 percent of payroll or 0.72
percent of the gross national domestic product would be
sufficient to cover the costs of currently promised benefits
for the next 75 years.
Long range Social Security solvency is directly linked to
the strength of the economy. But continued economic growth
alone will not solve all Social Security's long-term problems.
We must begin a real debate, beyond the debate of
privatization, to make the adjustments that can be made today
to ensure that the program will be intact for future
generations, and the sooner we begin to do it the better.
And as I look at the Members of Congress here, I know that
John Spratt and I are probably the only two here that were in
the Congress in 1983. I know Mr. Spratt remembers, like I do,
how we waited too long to address the problems of solvency in
Social Security. You have to remember how hard it was to vote
for what we had to vote for because in that 1983 vote that we
had to vote for was for the first time to tax Social Security
and citizens are still outraged by that. For the first time, we
said if you go to college full time you can have Social
Security, which had been up to that point the fact. And for the
first time, we raised the age from 65 to 67. So if we don't
start acting sooner rather than later, some very difficult
decisions will have to be made as were made in 1983. And in the
meantime we must move back toward efforts to pay down our
mounting Federal debt not attributed to the trust funds.
During the last year of the previous administration, the
Clinton administration, and during the first year of the Bush
administration, our Nation was on track to completely repay
public debt by 2012.
This would have taken a tremendous burden off future
generations expected to repay obligations to Social Security
trust funds, and also cover their needs as well.
Last year's 10-year $1.7 trillion tax cut, combined with
the sagging economy and the subsequent need to respond to the
horrific events of 9/11 completely erased a projected 10-year
$5.7 trillion surplus.
Now, instead of paying down debt, we are increasing debt,
and the related interest cost to our younger generations.
Therefore, the National Committee, the committee that I am
president of, opposes efforts to extend last year's tax cuts
beyond 2010.
This extended tax cut is estimated by the Center on Budget
and Policy Priorities to cost an additional $4 trillion to the
general fund in the decade beginning in 2012. Ironically, that
decade is at the same time that those baby boomers that we
constantly refer to are coming down the pike. We must put our
priorities in order.
All of the demands of future revenue should be laid aside
until this task is accomplished. Diverting Social Security
payroll taxes to private individual investment accounts also
worsens Social Security's long-term projected shortfall and
requires even more revenue to maintain current promises.
Funneling even 2 percentage points of payroll tax out of
Social Security and into private accounts more than doubles the
long-term shortfall, today's promised benefits.
Of the three plans put forward by the President's
Commission to Strengthen Social Security, the Social Security
actuary has found that if implemented today, during the period
from 2003 to 2012, the plan boosts the unified deficit by $1.2
trillion, plan 2 by $1.5 trillion, and plan 3 by $1.3 trillion.
All three plans called for large reductions in the
guaranteed benefit as great as 43 percent for those retiring in
2075. Even for those who do not opt for the voluntary account,
this happens. Thus, the solution proposed by private accounts
only digs the hole deeper, requiring even greater cuts in
defined benefits and lawyer demands on future revenue sources.
While the goal of expanding national savings is laudable,
private accounts in lieu of guaranteed benefits merely
substitutes one form of retirement savings for another. We must
improve incentives for younger workers to invest and save on
top of, not in place of, currently promised Social Security
benefits in order to expand both individual and national
savings.
In closing, I say to the members of the Budget Committee, I
agree with Chairman Nussle that this has been a marvelous,
educational conversation. I hope you will keep having this
conversation about future solvency, because there is no doubt
in my mind that a developed country like the United States of
America is going to have some sort of retirement-guaranteed
government program for the old and the disabled.
But, I do hope that you can keep the debate separate, the
conversation separate between these--you know, some of us
disagree about how you go about ways, we often have honest
disagreements. But the fact of the matter is, there are those
who want to have a different system, who want to have a
different structure. And there probably will be many other
suggestions along the way. But I urge you to continue to think
about solvency. Continue to think about the fact that there
always will be elderly people. There always be poor and
disabled people.
I thank you very much for allowing me to speak today.
[Prepared statement of Ms. Kennelly follows:]
Prepared Statement of Hon. Barbara B. Kennelly, President and CEO,
National Committee to Preserve Social Security and Medicare
Chairman Nussle, Ranking Member Spratt, members of the committee, I
appreciate the opportunity to testify before the House Budget Committee
on this issue of critical importance, the long-term budget outlook for
Social Security. On behalf of the millions members and supporters of
the National Committee to Preserve Social Security and Medicare, I am
delighted to be back in the halls of Congress with my former
colleagues. Thank you for holding this timely and important hearing.
Most Americans who have any recollection of the Great Depression
will understand that Social Security was created to guard against what
President Franklin Roosevelt described as the ``hazards and
vicissitudes of life.'' For nearly 70 years Social Security has
guaranteed working families would have some income in the event of old
age, death of a family wage earner or disability.
Social Security provides benefits in a manner that is both
progressive and fair. No other wage replacement program, public or
private, offers the protections of the Social Security Old Age,
Survivors and Disability Insurance program. In addition to retirement
income, 38 percent of all Social Security benefits are paid to disabled
individuals, spouses of retired and disabled workers, dependent
children and survivors.
Today Social Security continues to meet this challenge, and despite
recent economic sluggishness, the 2002 Social Security Trustees' Report
shows an improved forecast for the system with full solvency extended
another 3 years to 2041. By 2017, Social Security will have accumulated
over $5 trillion in treasury bonds, backed by the full faith and credit
of the United States Government.
In 2017, the program will begin to tap its interest on these bonds.
Beginning in the year 2027, interest and tax revenues combined will be
insufficient to meet benefit demands and the program will need to
redeem bonds held by the trust funds. In the year 2041, if no changes
are made, the trust funds will be exhausted and incoming revenues will
meet only about 72 percent of current benefit obligations. Even at this
point, Social Security will not be ``broken.'' This shortfall, if
addressed today is quite manageable. Benefit adjustments and/or new
revenues equivalent to 1.86 percent of payroll or 0.72 percent of GDP
would be sufficient to cover the cost of currently promised benefits
for the next 75 years.
Long-range Social Security solvency is directly linked to the
strength of the economy. The prosperity of the late 1990s dramatically
improved the financial outlook of Social Security, with the date of
insolvency improving 14 years (2027 to 2041) in the past 6 years, on
the strength of the economy alone.
But continued economic growth alone will not solve all of Social
Security's long-term problems. We must begin a real debate, beyond
privatization, to make the adjustments that can be made today, to
ensure that the program will be intact for future generations. The
sooner we begin, the less difficult the decisions will be.
First, we must move back toward efforts to pay down our mounting
Federal debt not attributed to the trust funds. During the last year of
the previous administration, and the first year of this one, our nation
was on track to completely repay public debt by 2012. This would have
taken a tremendous burden off of future generations expected repay
obligations to Social Security trust funds and cover their other needs
as well.
Last year's 10-year, $1.7 trillion tax cut combined with a sagging
economy, and the subsequent need to respond to the horrific events of
9/11 completely erased a projected 10-year $5.6 trillion surplus. Now
instead of paying down debt, we are increasing debt and the related
interest costs on our younger generations. As the power of compound
interest also works in reverse, this huge change in our budget outlook
will mean $1 trillion in new interest on the debt in just the next 10
years.
Therefore, as the National Committee opposed the tax cuts enacted
last year, we must also oppose efforts to extend of those tax cuts
beyond 2010. This tax package is estimated by the Center on Budget and
Policy Priorities (CBPP) to cost of an additional $4 trillion to the
general fund in the decade beginning in 2012, ironically the same
decade in which we are concerned about the general fund's ability to
cover the cost of interest owed to the Social Security trust funds. In
fact, the CBPP analysis has found that the cost of the tax cuts, if
extended 75 years, is more than twice as large as the long-term deficit
in Social Security.
It is not that we oppose tax cuts in principle, but more a
recognition that we must place our priorities in order. If meeting our
future obligations to Social Security and Medicare without having to
resort to painful benefit cuts is our number one priority, we strongly
believe that all other demands on future revenues should be laid aside
until that task is accomplished.
Today Social Security remains fully self-financed and is not
responsible for even one penny of the Federal debt. While Social
Security surpluses accumulated since 1983 were intended to pay down
debt held by the public to reduce future burdens related to the
retirement of the baby boom, with the brief exception of the past few
years this has not happened. Our recent return to spending Social
Security trust funds on general needs marks a return to using the
regressive payroll tax to finance general revenue programs.
Although we have many fundamental problems with the concept of
privatization, perhaps the biggest argument against transforming part
of Social Security into a system of individual retirement accounts is
the tremendous cost of the transition. Although individual accounts are
often presented as a way to ``save'' Social Security, diverting money
to individual accounts actually worsens Social Security's long-term
projected shortfall and requires even more revenue to maintain current
promises. Indeed, funneling 2 percentage points of payroll out of
Social Security and into private accounts more than doubles the long-
term shortfall for today's promised benefits.
Of the three plans put forward by the President's Commission to
Strengthen Social Security, the Social Security Actuary has found that,
if implemented today, during the period from 2003-2012 plan 1 boosts
the unified deficit by $1.2 trillion, plan 2 by $1.5 trillion, and plan
3 by $1.3 trillion. All three plans call for large reductions in the
guaranteed benefit as great as 43 percent for those retiring in 2075,
even for those who do not opt for the voluntary account. Plans 2 and 3
have been deemed ``solvent'' only because they call upon the general
fund for trillions of dollars in general revenue transfers with no
specified source. Under plan 1, program expenses exceed tax revenues as
early as 2009, plan 2 by 2006, and plan 3 in 2011. Thus the
``solution'' proposed by private accounts only digs the hole deeper,
requiring even greater cuts in defined benefits and larger demands on
future revenue sources.
Further, the level of individual risk privatization would introduce
to Social Security is unacceptable. Although proponents of
privatization like to talk about market averages, there is no such
thing as an investor who earns the market average every year. Even if
individual accounts could work well for upper-income earners and
earners without dependents, they would not work as well for low-income
workers, people of color, disabled workers or families.
While the goal of expanding national savings is laudable, private
accounts in lieu of guaranteed benefits merely substitutes one form of
retirement savings for another. We must improve incentives for younger
workers to invest and save, on top of, not in place of currently
promised Social Security benefits in order to expand both individual
and national savings.
solvency alternatives
I urge you to keep the security in Social Security and focus on
changes that do not dismantle its principles of shared risk. A few of
the solvency alternatives (in addition to debt retirement) we have
suggested Congress consider include:
1. Supplementing payroll taxes with general revenue. An influx of
dollars from general revenues would help meet the increased demands of
an aging population. If the same level of general revenue commitment
contained in various private account proposals now on the table were
directly applied to solvency of the current program, solvency could be
extended without exposing beneficiaries to benefit cuts or the vagaries
of the market.
2. Increasing the maximum wage base. Currently, the first $80,400
of earned income is subject to payroll tax. The base could be increased
so that 90 percent of covered earnings are taxable and indexed
thereafter.
3. Expanding coverage. Newly hired state and local workers could be
brought into the Social Security program. This would provide these
workers with increased retirement security, greater freedom in changing
jobs and added protection from the eroding effects of inflation on
income.
4. Government investment of a portion of the trust fund reserves.
Private investment of a portion of the reserves should be seriously
considered and debated. We could invest some of the reserves in an
indexed selection of stocks and allow Social Security to realize a
higher return on its investments, without appreciably increasing
individual risk.
Chairman Nussle, Congressman Spratt, thank you for holding this
important hearing today. We look forward to working with you toward a
truly bipartisan effort to reinforce Social Security as the bedrock
safety net for all of America's working families. I would be pleased to
answer any questions you may have.
Mr. Hastings [presiding]. Thank you. I want to thank all
three of you for your testimony. Mr. Spratt, in line with the
precedent that the chairman started, I will recognize you
first.
Mr. Spratt. Well, I first want to first say to Gene
Steuerle and Maya MacGuineas, I didn't put the question to you
about the trust fund report, and about the actuaries. But I
think you have added something to the understanding of our
process by devoting your attention to it, both in terms of
process and particularly as to the integrity of it. When Tim
Penny spoke to me about the possibility of being on the
President's Commission, and asked me if I had any ideas about
it, my only recommendation to him was that they should use the
Social Security actuaries to do whatever analysis they did. We
need to have one scorekeeper so that we can keep some
commonality and comparability about the wealth of different
proposals that have been put out there.
Gene Steuerle, you have actually proposed a Social Security
solution that has a number of different elements. I want to
give you an opportunity to explain your concept of it as you
formulated it several years ago. I know it appears in different
versions today. I think you were probably the grandfather, if
not the father of the Stenholm proposal as it is called in the
House. Would you explain how it would work?
Mr. Steuerle. Mr. Spratt, I should say that I was on the
National Commission on Retirement Policy which Mr. Stenholm was
the co-Chair. I agreed to sign onto that proposal. But we had
disagreements on the Commission as well. So I have never come
out with an exact proposal.
But I can tell you the elements of a proposal that I would
tend to believe are fair and ``do-able.'' Quite honestly, I
believe there is a lot of room for compromise. I believe that
this huge debate, for instance, that we have over individual
accounts is exaggerated on both sides, and that there are
really compromises that are available.
The fundamental way that I start off looking at this
program--that I use to address the system--is, to ask myself,
``what are the principles under which a system can work?''
There is a core set of public finance principles. We want equal
treatment of equals--which is sort of an equal justice
principle--and some progressivity. We want to take care of the
poor, we want the system to be efficient, and we want it to be
as simple as possible.
Mr. Spratt. You also took the opportunity, as long as you
were at it, of changing the benefit structure as I recall, to
deal with some inequities in it today.
Mr. Steuerle. My fear, again, on both sides of the aisle,
is the fight over preserving the system or only adding
individual accounts ignores that the core of the system, which
would remain, which would still be very large, whether you have
individual accounts or not. That core basically needs some
substantial reform. Particularly the system has substantial
discrimination, as I stated in my testimony, against single
heads of household who can work, pay taxes, raise children--do
all of these things we think we might be worth subsidizing--and
get lower benefits than people who don't do any of those
things.
That is among the types of reforms. Another concern is the
system at the margin does a very poor job in attacking poverty.
It has become more and more of a middle-aged retirement system,
and it gives higher and higher levels of benefits to everyone
overtime. There is substantial money in the system already with
which we could solve poverty, whether we lower benefits over
time or not. We already pay out enough that we can eliminate
poverty among the elderly altogether, and we don't.
So there are a lot of issues in the core Social Security
program--which is going to be this pay-as-you-go system--that I
think we should deal with, have been put to the side in this
constant debate over individual accounts or no individual
accounts.
Having said that, I think the case can be made for
individual accounts as put forward in the Stenholm-type
proposal. I tend to favor them, partly because as this
committee would understand, it gives honest budget accounting.
When the money goes into the account, it is recognized as an
outlay of government, and therefore deters the type of action
where people make promises in the future but don't have to fund
them. So you make a promise, it has to be funded.
Now, the related problem the individual account advocates
have is that if we are going to put money in these accounts, we
have got to fund them. Now they are asking us how we are going
to do that. That is an honest scorekeeping aspect that I don't
think you have in the current system.
I also tend to favor individual accounts a little bit
because it is a back-door way of dealing with some of the
fundamental problems in our private pension system, which is
the issue just off the table. Well over half of the population
gets almost nothing or gets very little in the way of private
pension benefits. We need to figure out a way to increase
saving among them. So I am willing to and actually quite
supportive of efforts to try to put these type of accounts in
the system. But it is for these particular reasons.
In sum, I want to have a core system that does a better job
in removing poverty among the elderly. I want it to remove some
of this discrimination against single heads of households, and
along the way, as a budget accounting rule, I tend to be
someone who supports a lower growth rate of benefits, primarily
because I think these entitlement programs are deterring us
from spending more on education and other more vital needs of
our society.
I really do not believe that giving people like myself a
17th, 18th, 19th year in retirement is a priority of our
society, and it should not be. The current system has that as a
priority over what I believe to be more fundamental needs.
So for that reason, I am quite willing to support a lower
rate of growth of benefits, primarily, in my view, through
increasing the retirement age and aiming for some fixed number
of years of retirement support--15, 16, something like that.
Mr. Spratt. Let me ask each of you: The actuaries have
indicated that if 14 percent of the trust funds were invested
in equities, 46 percent of the estimated shortfall would be
resolved. Is that a viable solution? Let me turn first to
Barbara Kennelly. Does the National Committee regard this as,
at least, something worthy of consideration?
Ms. Kennelly. Yes. And what Gene has said is what I agree
with. That the debate has just got off of hand, we are not
addressing the real problems. And you can disagree. But the
National Committee is not saying don't do anything. The
National Committee is saying, and I agree with Mr. Walker, when
you do something, it has to be a package of some things that
you do, because we all know come 2041, we are short 27 percent
of funds we need to pay for full Social Security.
Mr. Spratt. That was the wisdom of 1983 which you referred
to. Everybody had a stake in this solution.
Ms. Kennelly. But I really felt very badly, because when
the previous Commission on Social Security came out, one of the
strong recommendations, they also had three suggestions, but
one of the strong recommendations was investment by Social
Security, or by the government, into the market. And
unfortunately practically the next day, Mr. Greenspan came out
and said, ``oh, no, no, we can't do that. I mean, how could
this happen? And how could we have a board that could control
this?'' I felt like saying, ``do you think you are the only
honest man in Washington? You are the Federal Reserve.''
But, it just sunk like that. But in my list of things,
there are many ways of filling in the gap. I definitely say
that we should look at the market.
Mr. Spratt. Gene.
Mr. Steuerle. I am not arguing that one can't put stocks
and bonds in the trust funds. My concern is if the goal is to
have more ownership of stocks and bonds, I think that that
probably is better served on the private or the individual
side. And my reason is that simply transferring money to buying
stocks doesn't increase saving in society. All that happens
there is, in an accounting sense, the government now lays a
greater claim upon national resources than it does, say, if it
is investing in bonds. So it doesn't necessarily improve the
economy.
Mr. Spratt. But it improves the rate of return in the trust
fund's assets.
Mr. Steuerle. Because now the trust fund owning stocks mean
people in the private sector own less stock, so the private
sector gets a little lower income than goes to the trust fund.
Again the question is whether we increase saving in the
process. If we don't increase saving, there is no net gain for
the economy or for citizens, we just get a little more money on
the trust fund side.
My concern--and I have to say it is an issue of political
economy and not economics, I have to be quite honest about it--
is that I think every nation that has tried to do this has run
into problems of how you control what the government is going
to buy or not buy. Admittedly, we do it when people put money
in the Thrift Saving Plan. State and local governments do it.
But you do get this problem: if you invest in the Standard and
Poors 500 Index; what happens if you are company number 501 and
the government is not investing in you? Or you are a small
start-up company, you are not listed on the stock market, you
don't get this government investment. Or the whole question of
social investment in tobacco companies.
These issues will not remain off the table. So I think
politically it is probably easier if we can figure out ways to
resolve them with individual accounts.
I don't necessarily mean they have to be individual
accounts along the lines of any one proposal or another. You
could have individual accounts along the lines of President
Clinton's proposal if you want. But I just think if you are
going to control where the stock is going to be invested, it is
better to leave that choice to the individuals.
Mr. Spratt. Ms. MacGuineas.
Ms. MacGuineas. I will be brief because Gene made the same
points I would make. But I think the suggestion suffers from
the popular misconception that we can get out of this problem
by merely increasing rates of return. That is not what it is
about. It is not about switching investments in one place for a
different kind in another place. That is purely an asset
shuffle. You are going to have the government owning more stock
and, therefore the public owning more of the government bonds
that were there before, and the returns on the assets are going
to converge as necessary.
So you can't sort of switch with one hand your investments
to your other hand and resolve the problem. If the discussion
is about how best to prefund the system through private
accounts or centralized trust funds, that is a good discussion
to have. But we have to be talking about what consumption we
are going to reduce in order to improve saving. And that comes
from policy changes, either in taxes or benefits, it doesn't
come from shifting.
Then finally, I do tend to agree with the Greenspan
concerns of the political economy issues at hand. This is
trillions of dollars that would be invested centrally by the
government. And I am quite concerned that it would, over time,
compromise the ability of the capital markets to allocate
capital as efficiently as possible.
Mr. Spratt. Both of you have indirectly undercut an
argument that Martin Feldstein makes for one of his proposals.
Namely, he assumes that the transfer of Social Security assets
into the equity markets would have an effect on the economy,
and that the Treasury and the next stage would be able to reap
higher returns from corporate returns as a result of this, cost
of capital would go down, companies would become more
productive and efficient, they would become more profitable,
and consequently, the Treasury would reap some of the return
for this in income taxes.
I take it from what you said you don't think there will be
an economic effect like that by simply investing in the market,
using these assets to invest in the market?
Mr. Steuerle. In Dr. Feldstein's case, he is actually
making an assumption that there is also some shift out of
consumption. Under some analyses he has performed, he assumes
that government spends less on other consumption items. That is
really the source of the additional savings that lead to this
investment. Again, if it can be done the right way, this
attempt to lower consumption is in both the attempt to put
Social Security off-budget on the one side and the attempt to
put money in individual accounts on the other.
The common goal is to successfully change the target, the
deficit target of Congress, which both sides of the aisle
attempted to do last year by defining a non-Social Security
budget surplus as one way of getting there. Or individual
accounts might do that by having the money counted, as I said,
immediately as an outflow of government.
If you can change the accounting so Congress has a tighter
target, than the savings come from the fact that Congress
basically, somewhere in this system--it might be in the non-
Social Security part of the system--is spending less or taxing
more. But it is getting the government in more balance. And
that is really the source of saving that Dr. Feldstein relies
upon.
If that occurs, it probably would improve the economy.
However, my concern is not that we don't work on these savings
issues. I think they are vital. But I have been in this town
now 30 years, essentially working on saving proposals from one
administration to the next; one Congress to next. Quite
honestly, we cannot totally control net national savings. We
can control government saving. We can mandate individuals do
certain things with one hand, but we can't control what they do
on the other because we are in a democratic society.
We can only do things to try to improve net savings.
Mr. Spratt. Let me ask each of you, do you then support, as
a first step, the idea of using the surplus to buy up
outstanding government bonds, pay down debt held by the public
and add to national savings?
Ms. Kennelly. We did that for 2 years. What resulted is we
were going to be able to pay off the debt by 2012. We saw that
in action when we did have the surplus, because by law, when
you have certain amounts of money, you can only use it to pay
down the debt. But I would like to go back to your previous
question for a minute and say one thing--we always talk about
the picture in Washington, because we are dealing with the big
picture. But if you look at the individual out in the country,
nothing was mentioned when you asked that question about
investing in the market about risk. And why one of the reasons
that we are for looking at the investing in--the government
investing in the market is the risk would be shared.
In the individual accounts, the risk is there for each
individual, and if they retire at a time when the market is
down, they have to pay for that by themselves and they lose
their dollars. And there really is no insurance for them in the
individual accounts.
Ms. MacGuineas. From an economic perspective, I think the
approach of paying down the debt was a very solid, well
thought-out approach. I did, at the time we were talking about
it, spend a little time worrying about what was going to happen
when all of the debt was bought up, but I am not so worried in
the short term any more.
Mr. Spratt. As Larry Summers said, that was like his
worrying about going on a diet and losing too much weight.
Ms. MacGuineas. So yes, paying down is debt is the way to
increase public saving. That has the same kind of effects as
creating private accounts that create new saving in the private
sector. But, I think the question is, what mechanism can create
the budgetary discipline necessary to accomplish this in a
sustainable way. My concern is we have had those trust funds
for decades. We have seen that the presence of the Social
Security surplus not only leads to the use of that surplus, it
may, some academic research has shown, lead to more than--
spending more than just in the Social Security surplus, because
of the psychological effects of feeling like there is more
money at hand.
I believe one of the fundamental advantages of private
accounts is that it would take that money out of the budget and
wall it off, if you will, in a way that I think makes sustained
savings far more likely.
Mr. Spratt. Thank you; all three. I appreciate your
participation. Let me give others a chance to ask questions.
Mr. Hastings. I want to thank you all for being here. Let
me ask a question of all three of you, if any of you have
hopefully the answer to this. All of you alluded to the 75-year
projections that were in this trustees' report. Social Security
is nearly 70 years old now.
Has there been a study that you are aware of going back to
the--when Social Security started of what these projections
would be, recognizing, of course, that there were changes in
the benefits over a period of time, and obviously a new study?
I mean we remind ourselves we were in the Second World War when
Social Security was founded.
So are you aware of any in-depth study as to what the
projections were at the time of Social Security, on what it
would be, say, 75 years, I don't know if they looked at 75
years in the 1930s or not. Are you aware of any of those
studies?
Ms. Kennelly. I would go back to the previous actuary
reports. Because that is exactly why we have them, so that we
can do those projections. But, as you say, so much has changed.
When Social Security began the lifespan was 67, say, so you
were only going to be paying 2 years. The whole demographic
picture continues to evolve. But I think your actuarial reports
are about as good as they get.
Mr. Hastings. Mr. Steuerle.
Mr. Steuerle. Early on, the system was not indexed as it is
today. The early system had a tax rate of 2 or 3 percentage
points of payroll. There were projections that that would be
insufficient if there wasn't some funding because the costs
were going to rise at that time to 6 percent of payroll.
But after that point in time, there were substantial
benefit increases that were enacted by a number of Congresses.
Mr. Hastings. Starting when, roughly?
Mr. Steuerle. Probably the biggest increase came early in
the Eisenhower administration. Now mind you, by the way, that
Social Security's long-run costs were quite moderate when it
was established. Then we had these increases in the Eisenhower
administration, partly to make up for the fact that inflation
through World War II had substantially reduced benefits. We
didn't have automatic growth. Congress was able to act a bit
more in a discretionary manner as in other parts of the budget.
Then we started enacting a number of increases in Social
Security. In particular, as the defense budget kept shrinking,
we had more and more money that we shifted off to domestic
policy and that we could afford in the broader budget context.
In the late 1970s and early 1980s, we decided to try to
move more to a system of indexing because we weren't quite
happy with the way that we were having these constant
enactments by Congress. So there was an attempt to create an
automatic mechanism that would be cleaner, in some sense, and
create a more equitable benefit.
In some sense it did. But the consequence was, we built all
of this growth into the system.
Mr. Hastings. How accurate were the projections at these
times, because we are looking at a 75-year projection? We will
be making decisions on this as this debate goes forward based
on those 75-year projections. What I am asking is how accurate
were those projections when they were made at these given
times?
Mr. Steuerle. I would have to check with the Social
Security Administration. My guess is they were probably fairly
accurate, that most of the changes came about because of
enactments by Congress.
Mr. Hastings. OK.
Ms. MacGuineas. I would have thought if there were a study,
Gene would have done it.
Mr. Hastings. Let me ask another question to all three of
you. Mr. Walker, when he was up here, made, I thought, a rather
profound observation, when he said the expectations of the
boomers to some extent and the expectations of the Gen-Y and
the Gen-Xs to a larger extent are of the idea that their
expectations of receiving full benefits from Social Security
will not be there, and therefore, the potential fix that we
have may be easier than what would be otherwise thought.
I hope I characterized that correctly. I would like your
observations on that.
Ms. MacGuineas. Two points on that. I believe that that is
probably the case. Actually, though, the literature I have seen
is slightly different. People's expectations tend to be wrong
about what they are going to receive, but they are wrong on
both sides. Many people think it is more. Many people are
surprised to learn how low the benefits are.
Many people think they are going to do much worse because
they think that Social Security is not going to be there for
them. So I have seen huge discrepancies in our expectations as
compared to reality, but on both sides and also along the
income spectrum.
Mr. Hastings. In that train of thought, then, are those
that as you described that are higher expectations, lower
expectations, what percentage of the people feel that way?
Ms. MacGuineas. I would have to check the specific numbers.
I was just struck with how few people actually knew what they
should expect from Social Security.
Mr. Hastings. I interrupted you.
Ms. MacGuineas. But to your bigger point, I am not sure if
the fairest way to figure out how to spread the costs of
reforming the system is to say let's do it based on what
people's expectations are, because you may have an expectation
for something that is going to be very negative because of
information they have received. I am not sure that giving
somebody something that is just a tiny bit better than very
negative still means that we have done the best in for making
the system as fair as possible.
I think one of the crucial things in keeping support for
Social Security is making people feel like they are treated
fairly. And in this difficult situation which we are currently
in, I think that is going to involve spreading the whole cost
of reform between individuals and in particular, generations.
Mr. Hastings. OK.
Ms. Kennelly. Congressman, I agree, probably that many,
many young people don't think Social Security is going to be
there when they get older. And one of the reasons for that is
that millions of dollars have been spent on this message to say
Social Security won't be there. And I have to take that a step
further, these advocates of the individual account are very
much active, such as CATO in saying that very thing. But I
would disagree with Mr. Walker that the baby boomers don't
expect Social Security to be there. I think that they do. I
think the lower the income of the individual, the more they
expect that it will be there for them.
We are a country that has always had a Social Security
system as every other developed country has had a Social
Security system. I can't imagine this great Nation not having
it. I know that when I was younger, I certainly never thought
about retirement.
But we have so much talk, every magazine, all of the
magazines on the stand about retirement policy, about
investing. This morning the talk about the 401(k) plans. But
there are so many people out there. The average median income--
the average income for families in this country is $30,000.
People with a couple of kids can't afford some of these things
that some of us take for granted, like 401(k) plans.
So I think there is certain--a great deal of expectation,
middle age and lower and middle income people, that it will be
there.
Mr. Steuerle. Three very quick anecdotes on expectations.
The first is that the retirement age is increasing right now.
You can hardly even pick up a comment, at least on increases in
what is called the normal retirement age, in the paper. Few
notice this is happening. That is because it has been taken out
of a political context. People's expectations haven't been
dashed, at least as far as I can tell there.
Second is that the system between 1995 and 2000 basically
increased its future benefits for people by about 10 percent
above what they were expecting in 1995. Nobody is even aware of
this, as best I can tell, essentially because the system is
wage indexed. When the economy grew about 10-percent more over
those 5 or 6 years than we expected, it did all sorts of
wonders for the non-Social Security part of the budget.
In Social Security, it basically raised everybody's
benefit, your benefits, my benefit, by 10-percent beyond what
we would have projected, even in our Social Security statement
in 1995. Almost no one noticed that 10 percent bonus, which was
probably the largest single decision made by Congress between
1995 and 2000 in terms of spending, and it came about
automatically.
So in terms of expectations, I think that people do not
have great expectations.
And the final example is that few people are aware that the
system is automatically increasing benefits. In the debate over
reform, few people note that we are basically talking about
cutting the rate of growth of benefits. We are not cutting real
benefits.
Mr. Hastings. Maybe that leads into what you talked about,
Mr. Steuerle, about the annual benefits and lifetime benefits
and the differentiation between that and the focal point of our
debate. Would you elaborate on that difference between the
annual benefits and lifetime benefits?
Mr. Steuerle. Well, there were two aspects to my note. The
first was that I was arguing simply that we should count
lifetime benefits because that is the basic insurance policy
that people are getting. And people should understand what
their lifetime benefits are and not just look at an annual
benefit, just as if we were putting money in our 401(k) plan.
We want to know what is in the account.
The advantage of that is that I think it gives a more
honest accounting of how Social Security is adjusting over
time. It is not just adjusting annual benefits, it is adjusting
for the fact that we generally don't increase--the law actually
has a temporary increase--but the normal retirement age for
longevity. And the biggest growth in the system has come from
providing people with more and more years in retirement.
The second reason for calculating lifetime benefits is
geared toward helping those people engaged in reform actions. I
would much prefer these reform commissions aim for a target of
what they think lifetime benefits should offer first, and then
back up to what they think the system should be in the way of
annual benefits rather than first looking at annual benefits.
That way, they can decide whether we want to get more money
in late old age, when people have more severe problems of long-
term care. They may have lower incomes then, so do we want to
boost that benefit up relative to giving more money early in
their retirement.
If you start with a lifetime package of benefits, you
naturally think, just as you and I would, in drawing down our
401(k) plan. When you think only in terms of annual benefits,
you didn't think along those lines. You design a package, as I
said earlier, where and more and more of the resources go to
the younger among the elderly--really people in late middle age
who really need the resources much less.
Mr. Hastings. Thank you very much.
Mr. Moran.
Mr. Moran. Thank you, Mr. Chairman. In that regard, Mr.
Steuerle, you have a chart here showing that in the year 2000 a
two-earner couple would get total lifetime benefits of
approximately two-thirds of $1 million, apparently $650,000.
Do you have a comparable figure for how much they would
have paid into the system at that point?
Mr. Steuerle. In present value, for an average income
couple in Social Security, this depends on your discount rate.
But if you take a 2 percent discount rate--assume a 2 percent
rate on return--I think they would almost have paid in most of
the Social Security money.
In terms of Medicare, they would fall far short because the
Medicare tax is very low in its rate of growth, while the
projected rate of growth of health costs is very high. That is
what is driving the Social Security number--excuse me, I mean
driving the Medicare number.
Mr. Moran. So they would have paid in about $300,000 in
terms of the Social Security, FICA taxes, but any estimate of
how much less than the $350,000 they would have paid in versus
benefits that they received?
Mr. Steuerle. They probably wouldn't even have paid in a
third of it. But it can get a little complex there. Some of it
is coming from what they may have paid in income tax to support
the Medicare Part B system that was very low cost in the past.
I can send you the numbers.
Mr. Moran. That might be useful for us to understand. Now,
part of the reason that we have--at least equal to benefits, at
least equal to what is being paid in, and let me ask one other
question here. As we get to much later out, 2030 is the figure
that you show, are we paying in a higher percentage or a lower
percentage of what we are getting out of the system? I know
people are living longer, and so you would assume that you are
going to get a lot more back in terms of your annuity benefit
that you paid in later years. Is that the case?
Mr. Steuerle. As you move to the future, people pay at a
much higher percentage. They pay in more than they get back,
even at these moderate discount rates. That is because the tax
rate has continually gone up over time. Social Security created
very, very large windfalls to the early generations--in
particular to the rich of earlier generations, interestingly
enough.
But future generations don't get that windfall, because
they come to the point where they have to pay more for the
system now. This analysis is made very complex by the fact the
system is still out of balance. So you have to ask, what is the
actual tax rate that would apply in the future if you maintain
this benefit? It is higher than what is in the current law.
Mr. Moran. What I am getting at is, if you did do it on an
annuity basis, what in terms of FICA taxes will it take to
treat it as though it were an annuity, a tax-free annuity?
You are saying that you are actually--it is less of an
annuity, less of a good investment, from the perspective of it
being a private annuity, the longer you go out, because wages
are going up, you are paying a higher percentage despite the
income cap, and so your return is less you are telling us,
except for Medicare.
Mr. Steuerle. It is also very complex. Because ultimately
Social Security is designed so that the rate of return you get
in the future is determined by the birth rate. If birth rates
fall, your rate of return falls. So as birth rates have fallen,
our rate of return is lower than previous generations and on
into the future. So that is one of the consequences of Social
Security's pay-as-you-go design. Because it is not funded, it
is dependent on this money coming into the system.
Mr. Moran. Someone was saying, I remember people were
talking about it for a while, that you recover after the first
2\1/2\ years of being on retirement virtually of what you have
paid into the system. Now, the numbers you are telling us--that
is not consistent with that assumption at all.
Mr. Steuerle. I don't think people are counting the fact
that you as an employee really pay the employer tax. The
employer doesn't pay it, the employee pays it as a reduced
wage. Also, I don't think they are using interest rates. If you
paid money 30 years ago, it would be compounded at some rate.
Mr. Moran. So they are just looking at what the employee
has paid and not the comparable employer?
Mr. Steuerle. I am guessing. I am almost certain that they
don't compound the taxes, they don't use interest. The question
whether they use employer and employee taxes, I am not certain.
Mr. Moran. So that is a bogus statement that you are
getting back from the system, in just a few years of
retirement, what you paid in, the rest is coming out of
subsequent generations' incomes. That is just not the case.
Mr. Steuerle. I think for new retirees, I think the case is
weak. For older retirees, it is more true----
Mr. Moran. So it would been true for earlier retirees. That
is helpful to know. I am very sympathetic with your concern
about the efficiency and equity aspect of Social Security that
a lot of it is going to people who don't need it. And vis-a-vis
our other national priorities, it is a real question whether we
should and can be continuing such a system from that
perspective. But, just as the one of the principal reasons we,
or at least I consistently vote against vouchers or anything
else that is going to undermine the public participation in our
public--widespread participation in public school system, is if
you didn't have widespread benefit, then the people who need a
quality school system the most are going to be less likely to
be able to get that revenue flow that they need from general
taxes, similar case applies to Social Security.
If you don't have widespread benefits you are going to have
less political support for maintaining a system that, in fact,
in the long run, really does benefit lower income people to a
greater extent than it does upper. There is some income
transfer taking place within the system. You probably wouldn't
be able to sustain that politically if you don't have
widespread benefits at the level that we are paying out. Is
that not an accurate statement?
Mr. Steuerle. I think the concept of social insurance--and
I agree with it--is that you need to have a mandated system.
But there is a case with individual accounts where it is also
part of a mandated system. So the question is, what balance
would you achieve? I agree with you, you can't allow people to
opt out, because the people who opt out would be the people who
are paying for some of this redistribution. So people can't opt
out entirely from the system.
However, you could set up or design individual account
Social Security that also deals with some of the issues you
talk about, both with respect to progressivity and mandated
participation.
Mr. Moran. But my concern is any kind of testing system is
going to undermine the kind of political support that you have
today for the benefit distribution that you have. Let me ask
one other question. I don't want to go to far beyond my time
here.
But, on disability insurance--well, let's go to a broader
question. If we went--if we increased the retirement age at the
pace at which the health of our senior citizens is--the
longevity our senior citizens is increasing, which we don't do,
but if we geared it to the greater longevity that is being
achieved through improved health care, a lot of it paid out of
Medicare, et cetera; if we geared it to that, and you today you
would probably be in the 70s because the--I think when it was
established, the average length of age was only about 48 or
something.
So if you geared it to improved longevity figures, the
problem we would run into, and which I think is an untenable
situation, is that even though it is a declining proportion,
those people who work with their backs to do manual labor, men
and women, and oftentimes we think of men, but it is women who
are performing domestic work and so on.
The human body gives out, if you are performing that kind
of work in your late 50s, your early 60s, and it is not fair
really for these people to expect them to stay in the work
force at a level consistent with the general health of the
workforce, even through a greater proportion of people are not
performing manual labor in the United States today.
I would like for you to address that, and Barbara as well,
if I could have the indulgence of the chairman--thank you,
Chairman Hastings--if we could have a more liberalized
definition, for example, of disability so that people who are
in that kind of situation could, in fact, retire early, albeit
with a slightly reduced benefit level. I think we could then
kick in a more rational extension of age eligibility. I am not
sure, but I would like you to address that.
Ms. Kennelly. I hear what you are saying, Congressman. If,
in fact, we continue to increase the retirement age, disability
claims will increase. That argument has been made. But, getting
back to those individual accounts, I have read an awful lot of
material on individual accounts. We understand the market,
because most of us are in the market. What you put in, you get
more if your stock performs well, and if your stock doesn't
perform well, you get less.
I haven't figured out how you, in a practical way, can
bring people on disability to make any money in the individual
accounts. So I think that is a whole another avenue.
Mr. Moran. I happen to agree with you. That is one of the
major problems. But it is part of a larger problem with people
who are best able to manipulate within the field of investment
judgment are those that are----
Ms. Kennelly. Even if they don't have any income. But to
get back to the raising of the age, on my long list of things
that you can do to address solvency, one of them is that in
this increase that began to raise the age to 67, there is a gap
between 66 and 67.
And possibly to bring some money in, we might be able to
close that gap. But, I wouldn't like to suggest yet that we
raise the age any higher than 67, because we have no studies to
show exactly what you are saying. Did this make people go more
to disability? Would this change help people? Take for instance
the 62 retirement in regard to the 65 retirement, which will be
the 67 retirement. So I think that is a very difficult question
to address. But the disability question will have to be
addressed.
Mr. Moran. Well, we do know that people are living longer.
But as you say, it is this issue that really has to be
addressed if you are going to increase in a correlative way to
longevity. Thank you.
Mr. Steuerle.
Mr. Steuerle. If you look at the statistics when Social
Security was first established--that is, when benefits were
first paid in 1940--about 70 to 80 percent of men age 65 were
working. That has dropped to about 30 percent. Work then was
tougher. It was far more physically demanding.
Mr. Moran. You said 70 to 80?
Mr. Steuerle. It is something like 70 to 80 percent of men
at age 65 were working when benefits were first paid. The
average age of retirement in 1940 was 68. The average age of
retirement today--when people have longer life expectancy and
greater health--is 62 to 63 depending on how you count
disability insurance. So people are retiring earlier, several
years earlier, and they are living several years longer, even
while the physical demands of the jobs have been declining
quite substantially.
I can send you all of these data. Because I realize I am
being very quick here. The difficulty is, do we really need for
most people in the population, as I say, this 15th, 16th, 17th
or 18th year in retirement? I understand your sympathy for this
group in the population, whether it is 10 percent or 20 percent
of the population--that may have some physical impairments. But
it is very expensive to subsidize 100 percent of people who are
not in need for the 10 or 20 percent who are in need.
It is an issue. It is just that the system has become so
expensive that a number of years of support just seems to me
not a tenable result. I will say, however, that increasing the
retirement age does have an impact because we waited so long to
reform, and people retire now so much earlier. We have allowed
them earlier retirement even while they are living some much
longer. We are so close to the point in time when the baby
boomers retire that the adjustments have to be much faster and
much more swift than just simply indexing. The adjustment is
somewhat substantial.
Let me finally say that I think the main change that needs
to be made is in the early retirement age, not so-called
``normal'' retirement age. The age of 62 is the age that needs
to be bumped up more than worrying about what the so-called
normal retirement age is.
Mr. Moran. That is very helpful. Incidentally, let me say,
Mr. Chairman, I appreciate your inviting Mr. Steuerle, and
obviously, our colleague, Mrs. Kennelly. I don't know Ms.
MacGuineas, but I know that she was a player on the Commission.
Mr. Steuerle with the Urban Study has given us so much creative
information that it is a pleasure to have him testify before
us, I appreciate that. You have told me a number of things that
I actually wasn't aware of, and some of them are
counterintuitive.
Did you have anything further to add, Ms. MacGuineas?
Ms. MacGuineas. The only thing I would add would be that
one way to think about this may be to rather than just
increasing the retirement age, indexing benefits to life
expectancy, but allowing for a more flexible retirement age,
because obviously, I share your concerns, everyone would.
At the same time, as Gene said, it is unfortunate to not
understand this as a labor market problem and not create the
incentives to stay in the workforce longer when we know that
that would resolve part of the problem to protect one group.
I also think ensuring that we strengthen disability so it
can kick in for the people who need it is probably an important
part of the equation.
Mr. Moran. I do think that at least unless you deal with
that situation, even though it may be 10 percent it is a sine
qua non of reform. You have got to address that element of the
workforce. Thank you. Thank you, Mr. Chairman.
Mr. Hastings. Mr. Steuerle, in responding to Mr. Moran's
request on statistics as to retirement age, going back to, I
think you said the 1940s, my assumptions is that you probably
have those statistics for probably every year, that can be
found some place. Am I correct in that assumption?
Mr. Steuerle. I will try to find what I can. As you might
know, in many cases, I just rely on data that are kept by the
Social Security Administration. But I will be glad to.
Mr. Hastings. Whatever you can. I, as one Member would
certainly like to have these statistics, because, inevitably as
we proceed in this debate, that is going to come up. There is
no question about that. As we have to make some of those
decisions. I want to thank the panel for joining us. Barbara,
it was good seeing you once again.
Chairman Nussle [presiding]. That is a good suggestion.
Thank you. We do have two votes. I don't want to be
disrespectful. So why don't we--first of all, we are pleased to
have you. You also, as I said in the opening, there have been a
few people that have just been in the forefront of sounding the
alarm and letting folks know in a constructive way about some
of the challenges. And you certainly have added to that
greatly. I want to welcome you and thank you for your testimony
today. We will accept it. And then if we have questions we will
come back after the vote.
Director Crippen, welcome back to the committee.
STATEMENT OF DAN L. CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET
OFFICE
Mr. Crippen. Thank you, and Mr. Moran as well. I will, as I
said, put aside much of which I intended to say and try and
make probably just one point.
There is an advertisement running, I was reminded this
morning as many of your witnesses talked on disability
insurance, that uses Yogi Berra as the central figure in the
ad. Among the other Yogi Berrisms, he said, when you get sick
or if you can't go to work, this plan will give you cash, which
is almost like money--or just as good as money.
What we heard from most of the witnesses today--I can only
reiterate--is, you have to think about the cash. How we account
for current taxes and future obligations is important. But when
it comes down to it, it is very simple, I think. When I retire,
my children will pay for my benefits.
There is no way around that. Whether it is payroll taxes up
until 2017, whether it is payroll taxes and general revenues
after that, income taxes to pay interest, whether we end up
borrowing from my kids in order to pay my benefit, it is my
kids who will be funding my benefit.
We can argue about and think about all of the accounting we
want. But at the end of the day, my two kids are unfortunately
going to pay for me. Those of you who don't have two kids
should probably take a benefit cut.
But one way we can think about that--the way that I have
been talking about it for the past 3\1/2\ years, with this poor
bedraggled chart that has gone with me to virtually every
hearing--is as a percentage of the economy, how much is the
Federal Government transferring to retirees?
All of that has to come from workers, my children. There is
no magic way, there is no dollar stuffed in a mattress, there
are no offshore accounts here. It will be the current economy
at the time that is important both in my children's ability to
finance my benefit and, if you want to think about it another
way, in producing the goods that I will be consuming, because
what I consume, they can't.
So in that light, Mr. Chairman, I just want to say a couple
of things about what CBO is doing that I think will help that
debate when you all get around to having it in a more concrete
way.
One, we have been publishing a number of documents that I
hope will be helpful. We put out one last year called ``Social
Security: A Primer.'' It is aimed at policymakers, policy
analysts, and press. It has a lot of charts, graphs, colors,
and an attempt to explain Social Security from an economic
point of view.
We have done reports--like the one that is on the screen
now--looking at the uncertainty in Social Security. I think it
is important to note that while introducing individual
accounts, for example, might introduce new uncertainties into
the system, the system is already very uncertain in many ways,
and we don't know what the net effect would be.
We have just begun a series of 3- and 4-page reports--there
should be about 15 of these--looking at particular aspects of
the long-term implications of Social Security. We are putting
out about one a week.
Last and most important, we have spent the past 3 years
building a new long-term model that will be able to answer most
of the questions that you heard raised here today. We will be
able to look at the effects of reform on the economy. We will
be able to look at the effects of reform on individuals, any
given cohort of the population. We will be able to look at the
effects of reform across populations, across generations. We
will be able to do much of what Gene Steurele called for and
more perhaps.
We are in the throes of finalizing that model. It should be
ready for you when you are ready to do Social Security. With
that I will quit.
[The prepared statement of Mr. Crippen follows:]
Prepared Statement of Dan L. Crippen, Director, Congressional Budget
Office
Mr. Chairman, Ranking Member Spratt, and members of the committee,
I appreciate the opportunity to appear before you to discuss the Social
Security program. The Social Security Act of 1935, enacted in the midst
of the Depression, is widely seen as one of the most important
legislative accomplishments in U.S. history. Since its inception,
Social Security has grown to become by far the largest Federal program.
Over the next 30 years, the aging of the baby boom generation will pose
new challenges for Social Security, the Federal Government, and the
U.S. economy.
The Congressional Budget Office (CBO) has examined those challenges
in a number of recent reports. Late last year, we published ``Social
Security: A Primer'' and ``Uncertainty in Social Security's Long-Term
Finances: A Stochastic Analysis.'' Last week, we released a policy
brief on the long-range picture of the Federal Government's share of
the economy. My testimony today summarizes some of the findings of
those reports; it will make the following major points.
Once the baby boom generation retires, the portion of the Nation's
output that the Federal Government will spend on Social Security is
expected to rise by 50 percent from about 4 percent of gross domestic
product (GDP) today to an estimated 6 percent in 2030.
Addressing the growing cost of Social Security would not by itself
eliminate the economic and budgetary pressure caused by the aging of
the U.S. population. The rapidly escalating costs of the government's
health care programs are a major source of that pressure. CBO projects
that Federal spending for Social Security, Medicare, and Medicaid
combined will account for about 14 percent of GDP by 2030 nearly double
the current share.
Looking farther ahead, CBO projects that government spending
(excluding interest on the Federal debt) will rise from about 18
percent of GDP today to 28 percent in 2075 under current policies. If
revenues remain within their historical range relative to GDP, the
total cost of government (including interest) could double as a share
of the economy: from about 19 percent of GDP today to about 40 percent
in 2075. However, modest reductions in the growth of spending for
Federal programs could significantly slow the growth of interest costs
and total outlays.
Projections of Social Security's finances are highly uncertain, but
the range of uncertainty is not adequately reflected in the low-,
medium-, and high-cost scenarios used by the Social Security trustees.
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Uncertainty about long-term budgetary outcomes derives from many
factors, including rates of mortality, fertility, inflation, and real
wage growth. Social Security's finances are most influenced by
variables, such as mortality rates, that move independently of economic
growth, because outlays are affected more than receipts when people
live longer. That aspect of the system's finances is important to keep
in mind when designing proposals to reform Social Security. For
instance, a change in the retirement age that was linked to life
expectancy could automatically resolve the budgetary consequences of
any future changes in mortality rates.
The expected increase in Medicare spending highlights the
divergence between economic growth and budgetary pressures even more
clearly, because most of that increase results from health care costs
per beneficiary growing faster than GDP per capita. No mechanism in law
exists that will slow down that growth.
Although policymakers have many goals, if they want to limit the
growth of Federal spending as a share of GDP, they have only two
options: slow the growth of that spending or increase the growth of the
economy. The Nation's ability to sustain an aging population will
ultimately depend on how many goods and services the economy produces
and how they will be distributed, not on how much money is credited to
Social Security's trust funds.
The Pressures of an Aging Population
Over the next three decades, the aging of the baby boomers (the
large group born between 1946 and 1964) will put new pressure on Social
Security, the Federal Government, and the U.S. economy. The Social
Security Administration projects that the number of people age 65 or
older will rise by more than 90 percent during that period (from about
36 million now to 69 million in 2030), according to its intermediate
assumptions (see figure 1). At the same time, the number of adults
under age 65 who will largely be the ones paying the payroll taxes to
support their elders will grow by only about 14 percent (from 172
million to 196 million). Moreover, even after all of the baby boomers
have retired, the number of elderly people is expected to keep rising
at a faster rate than the number of non-elderly people as life spans
continue to lengthen.
Perhaps even more important, as the population ages, spending on
Medicare and Medicaid is likely to rise rapidly because of increases in
Federal costs per beneficiary as well as in the percentage of the
population eligible for benefits (unless major changes are made to
those programs). Medicare provides health insurance to most U.S.
residents age 65 or older and to eligible disabled people, most of whom
also receive Social Security benefits. Medicaid is a joint Federal/
State program that provides medical assistance to low-income people; in
recent years, a large share of its payments have gone to provide long-
term care, mainly for elderly or disabled people.
A Long-Range Picture of the Fiscal Situation
How will those pressures of demographics and health care costs
affect the U.S. budget and economy? To help address that question, CBO
has developed a new long-range model. Using the model, we recently
prepared a 125 year picture of the budget that extends from 1950 to
2075. Those projections illustrate a potential path for the budget that
highlights the implications of maintaining current policies. Of course,
the future path of the budget is highly uncertain and subject to wide
variation. Thus, the path shown in those projections is simply a
representation based on an illustrative set of key assumptions.
Although my testimony focuses on long-range projections of spending
under current policies, CBO is about to unveil an expanded version of
the model that will be capable of simulating the budgetary and economic
effects of policy changes including detailed proposals for Social
Security, such as the introduction of private accounts. One of the more
innovative features of the expanded model is its ability to perform
stochastic simulation analysis, which shows the probabilities of
alternative outcomes based on a statistical distribution of alternative
assumptions about such factors as returns on stocks and bonds,
mortality, fertility, and wage growth. The model will also include
equations that reflect how people alter their work and saving in
response to increases in taxes and cuts in benefits. We expect to begin
releasing analyses from that model sometime this fall.
In CBO's current long-range model, Social Security spending
reflects growth in the number of recipients and in wages, which
determine benefits. Medicare and Medicaid spending reflects the
increasing number of recipients and the age profile of enrollees as
well as the rising costs of medical care. For the long-range
projections described below, the growth in health care costs for each
recipient of a given age is assumed to slow to a rate 1 percentage
point faster than the growth rate of per capita GDP. Although seemingly
high, that rate is lower than it has been in recent decades. The budget
figures in these projections are expressed as a share of GDP so that
the magnitude of Federal revenues and spending can be observed in
relation to the country's total economic activity in any given year and
over time.
The projections show that it is spending for the major entitlement
programs and for interest because of the commitments involved and their
sheer magnitude that has the largest potential to constrain future
Congresses. Moreover, much of the government's remaining spending
consists of discretionary outlays, the levels for which are determined
annually. Given the wide array of discretionary programs, that category
of spending (unlike the major entitlement programs) does not easily
lend itself to projections that merge economic and demographic
assumptions with legislative rules for the payment of benefits. Thus,
CBO's long-range projections assume that defense, nondefense
discretionary, and all other spending (that is, other than for Social
Security, Medicare, Medicaid, and interest) will remain fixed as a
share of GDP beginning in 2012, the last year of the 10-year baseline
projections that CBO published in March 2002. The projections do not
incorporate the recently enacted farm bill and economic stimulus
package.
historical trends in spending
Spending by the Federal Government grew from approximately 3
percent of GDP in 1925 to about 16 percent in 1950. (Following the
Depression, World War II abruptly boosted Federal spending to about 42
percent of GDP, but afterward, that spending dropped and resumed a less
volatile growth trend). Since then, Social Security, Medicare, and
Medicaid have together become the largest component of the Federal
budget (see figure 2). In 1962, when Social Security outlays
represented only 2.5 percent of GDP, and Medicare and Medicaid had not
yet been created, spending for all other government activities made up
about 85 percent of Federal non-interest outlays. The largest share was
for national defense, which accounted for half of non-interest outlays
and represented 9.2 percent of GDP. By 2001, total spending for Social
Security, Medicare, and Medicaid equaled 7.8 percent of GDP, about
triple the 1962 share for Social Security alone. Although still
constituting less than half of all Federal spending, the three programs
combined accounted for the largest share of total outlays. Defense
spending had fallen to 3 percent of GDP, and all other non-interest
spending stood at 6.3 percent. Interest costs, whose share of GDP had
risen steadily from 1.2 percent in 1962 to a high of 3.3 percent in
1991, stood at 2.0 percent in 2001.
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projections to 2075
Looking ahead, CBO projects that outlays for Social Security,
Medicare, and Medicaid (based on the current rules for benefits) could
nearly double as a share of GDP by 2030, rising to about 14 percent. If
spending for all other government activities in 2030 remained at
roughly the same share of GDP as projected for 2012 (about 7 percent),
Social Security, Medicare, and Medicaid would account for almost 70
percent of the government's non-interest spending. By 2050, outlays for
the three programs would constitute nearly 17 percent of GDP, and by
2075, about 21 percent exceeding the share of GDP now absorbed by all
Federal revenues (see figure 3).
Under the assumptions that CBO made for its long-range picture of
government finances, the projected rise in spending for Social
Security, Medicare, and Medicaid would drive total Federal outlays well
above the level seen throughout much of the post-World War II period.
The government's core costs (that is, ignoring net interest on the
debt) could rise from about 18 percent of GDP today to about 24 percent
in 2050 and 28 percent in 2075. Left unattended, that steady escalation
in spending could cause major deficits to emerge, pushing the
government's debt, and its interest spending on that debt, to
unprecedented levels. If revenues remain within their historical range
relative to GDP, the total cost of government (including interest)
could double as a share of the economy from about 19 percent of GDP
today to about 40 percent in 2075 (see figure 4).
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Issues to Consider in Reforming Social Security
Several aspects of Social Security and the outlook for it as the
population ages are especially important in considering changes to the
program. First, throughout its long history, Social Security has had
multiple goals some related to redistributing income, others related to
offsetting lost earnings. In 2000, only about two-thirds of Social
Security's beneficiaries were retired workers; the rest were disabled
workers, survivors of deceased workers, and workers' spouses and minor
children (see figure 5). Policymakers will need to decide whether the
program's goals are still appropriate and, if so, how changes to Social
Security would aid or hinder the achievement of those goals and affect
various types of beneficiaries and taxpayers. Those decisions will also
need to take into account the dramatic increase in the elderly
population that is expected in the coming decades.
Second, issues about how to prepare for an aging population
ultimately concern the amount of goods and services that the economy
will produce and how they will be distributed, not how much money is
credited to the Social Security trust funds. In that sense, the
projected depletion of those funds which is the focus of much of the
popular debate about Social Security's future is irrelevant. The
challenges of adjusting to an aging population would need to be faced
even if the trust funds never existed.
Third, deciding how to prepare for an aging population is likely to
require weighing the interests of today's workers and Social Security
beneficiaries against the interests of future workers and
beneficiaries. No matter how it is packaged, any plan to increase
national saving today means that the U.S. population will consume fewer
goods and services now so that consumption can be greater in the
future, when a larger share of the population is retired. Gone are the
days when expansion of the labor force could pay for the growth of
Social Security benefits. (In past decades, Social Security's payroll
tax revenues grew substantially as the baby boom generation and women
of various ages entered the labor force in large numbers). As the
Congress looks at policy changes, one consideration is that future
workers and Social Security beneficiaries are likely to have higher
standards of living, on average, than current workers and beneficiaries
do, because of future increases in productivity.
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Strategies for Dealing with an Aging Population
Spending more on elderly people may be appropriate in light of
their increasing numbers, but questions can be raised about the extent
to which that spending should rise. Policymakers have many goals, but
if they want to limit the growth of spending on the elderly as a share
of the economy, they can do so in only two ways: either by slowing the
growth of that spending or by increasing the growth rate of the
economy. Different options for reform would have different effects on
economic growth. To the extent that those options boosted the future
size of the economy and increased the Nation's accumulation of assets,
they could lessen the burden on future workers from government programs
that serve the elderly.
My testimony focuses on three ways to prepare for an aging
population that have generated a lot of public attention: paying down
Federal debt, creating private retirement accounts, and making changes
to the benefits or revenues of the current Social Security program.
Those approaches are not mutually exclusive; they could be combined in
any number of ways. (In addition, many people have put forward
proposals to curb the rising costs of Federal health care programs.
Such proposals could also help the Nation deal with its impending
demographic changes, but they are beyond the scope of this testimony).
Regardless of which approach policymakers decide to take, a number
of key questions should be raised about any proposed policy option:
<bullet> How would it affect economic growth over the long run?
<bullet> Would the proposed policy improve the long-term fiscal
outlook faced by succeeding generations? How would it alter the taxes
they pay and the benefits they receive?
<bullet> Would the policy improve the ability of Social Security
and Medicare to respond to unanticipated changes in demographics (such
as life expectancy) and in the economy (such as productivity growth)?
Some proposals could help make those programs more adaptable to change;
other proposals could reduce their flexibility.
pay down debt
One strategy for preparing for the needs of an aging population is
to pay down Federal debt. If the government spends less than it
receives in revenues (and private saving does not fall too much in
response), national saving will rise, boosting the stock of private
capital and expanding the productive capacity of the economy in the
long run. Indeed, Federal debt held by the public has fallen sharply in
recent years from about 50 percent of GDP in 1995 to about 33 percent
today. That decline has freed up funds for investment in private
capital.
CBO will soon update its 10-year projections for the budget, but it
does not expect any significant surpluses to be available for paying
down debt for at least a few years. However, if current tax and
spending policies are maintained, significant budget surpluses could
reemerge at some point in the next 10 years. But even paying off all of
the Federal debt available for redemption would not provide enough
interest savings or additional economic growth to finance Social
Security, Medicare, and Medicaid spending over the long run.
create private accounts
A second strategy is to encourage private saving. A prominent set
of proposals envisions creating private retirement accounts. Those
proposals differ in many ways, but they share a common feature: the
income from an account would depend on the payments made into it and
the rate of return on the account's assets. Many types of accounts are
possible, and their effects would vary widely.
One of the central issues is how private retirement accounts would
be financed. Many proposals include a contribution from the government
to help people pay for accounts. According to supporters of private
accounts, diverting payroll tax revenues from the government could
prevent policymakers from spending those revenues on other programs and
could thus provide many of the same economic benefits as paying down
debt. In addition, they argue, private accounts could allow the
government to encourage asset accumulation while avoiding the problems
of having the government own shares in private companies. However,
because national saving consists of both private and government saving,
a proposal that simply moved dollars from government saving to private
saving (by financing private accounts through an increase in Federal
debt) would have no direct effect on national saving or capital
accumulation. To raise national saving, a proposal would have to cut
either government consumption, private consumption, or both.
Some people argue that private accounts would offer higher rates of
return than the traditional Social Security system does, but that
argument can be misleading. Social Security has a low rate of return
largely because initial generations received benefits far greater than
the payroll taxes they paid. That difference would have to be made up
even if the Social Security system was entirely replaced by private
accounts. Moreover, investing in the stock market either through
private accounts or through government purchases of stock for the
Social Security trust funds would be no panacea. Simply raising the
average rate of return on assets by taking on more risk would not
change the economic fundamentals. Only if the investment proposal
increased national saving and enlarged the economy would it reduce
future burdens.
In setting up a system of private accounts, policymakers would have
to address many practical issues. How much would the system cost to
administer? Would it provide insurance against downturns in the stock
market? Would the system require that accounts be converted into
annuities and, if so, under what conditions? How would it handle
benefits for workers' families, for survivors of deceased workers, and
for disabled workers? Would the system give subsidies to people with
low income and intermittent work histories? How would the system be
regulated and investors informed?
The answers to those questions could have implications for the
economy. For example, government guarantees that people would receive a
minimum level of retirement income in the event of a market downturn
would probably reduce national saving below what it would be without
those guarantees. And subsidies to low-income workers that were phased
out as wages rose could impose implicit taxes on work and could
discourage some people from working more.
make programmatic changes
A third approach is to modify the current Social Security program.
Changes that have been proposed include reducing benefits (for example,
by raising the retirement age, calculating initial benefits using a
price index rather than a wage index, or reducing annual cost-of-living
adjustments) or increasing payroll taxes. The effect on the economy
would depend on the particular kind of change.
Many types of benefit reductions could increase the size of the
economy in the long run because they could encourage some people to
save more. However, those long-term gains could take a couple of
decades to materialize fully, and the effect in the near term would be
uncertain. Slowing the growth of Social Security benefits could reduce
the lifetime resources of some transitional generations, but it could
also lead to higher wages and lower tax burdens for later generations.
If benefits were to be cut, changing the law now rather than later
would give workers time to adjust their plans for saving and
retirement.
Raising taxes to pay for future Social Security benefits would have
an uncertain effect on the size of the economy in the long run.
Moreover, the effect would depend on the type of tax increase and other
factors. If the revenues from a tax increase did not change the
government's decisions about other spending or taxes, national saving
could rise. But the extra revenues could encourage more government
spending, which would limit any rise in national saving. In addition,
increases in marginal tax rates on payroll or income could reduce
people's incentives to work or save, also dampening any increase in
national saving.
Although long-term projections of the Federal budget and the
economy carry huge uncertainties, one fact seems certain: the U.S.
population will age significantly over the next 30 years, and unless
policies are changed, spending on the elderly will rise sharply, posing
new challenges for the Federal Government and the Nation's economy.
Chairman Nussle. Mr. Moran, do you have any questions that
you would like to ask at this time?
Mr. Moran. Mr. Chairman, the answer is yes. But, given the
fact that Mr. Crippen has been here all morning, we have got a
vote, it seems to me that I can--I will have another
opportunity to ask them. But I do appreciate him being here,
and I appreciate all of the work that he has done in
elucidating the Social Security issue for us as well as
everything else with regard to the budget. Thank you, Mr.
Chairman.
Chairman Nussle. Thank you. I appreciate your coming and
your interest obviously.
Let me ask then, I just have one question so I will ask it
now and then we can--we probably have more questions. This
conversation will continue, I have no doubt.
In your testimony, I believe it was last December to the
Special Committee on Aging in the Senate, you said the
following--and I am interested in your elaboration on it.
``Issues about how to prepare for an aging population
ultimately concern the amount of goods and services that the
economy will produce and how they will be distributed, not how
much money is credited to the Social Security trust funds. In
that sense, the projected depletion of those trust funds, which
is the focus of much of the popular debate about Social
Security's future, is irrelevant. The challenge of adjusting to
an aging population would need to be faced, even if the trust
funds never existed.''
So would you elaborate on that just for the purposes of
this hearing, and then that is basically what I was interested
in hearing from you about.
Mr. Crippen. Obviously, just cut me off whenever you need
to leave. As many of the other witnesses said, the way to think
about this clearly, I think, is to follow the cash.
There is no cash in the trust funds. There are assets;
there are obligations. Those certainly will be made good. Think
of 2017, when it looks like we won't have enough payroll taxes
to fund benefits. The Social Security Administration will,
figuratively speaking, go to the Treasury and say, ``Give me
some interest payments for cashing in bonds actually or debt
instruments that pay interest.'' To do so, the Treasury will
have to raise taxes, cut other spending or borrow from my kids
in order to pay the interest.
If there were no trust funds, no interest, no bonds, and
the Social Security Administration didn't have enough cash,
they would essentially--assuming the benefit is paid--come to
the Treasury and say, ``we need cash.'' The Treasury would have
to raise taxes, cut other spending or borrow from my kids.
So the effect on the economy and the budget is identical,
whether or not you have these trust funds. The point is that,
as that poor bedraggled chart shows, there are only two moving
parts, if you think of the world the way most economists do:
the level of obligations to the elderly and the size of the
economy.
Anything else is noise below that; some of it is
interesting; some of it is informative, some of it is useful.
But it is not necessarily the right question.
I would argue that if you have reform in front of you or
you are questioning policy effects, whether they are current or
future, on Social Security, you have to look at the chart and
say, does it change either of those two things? Does it change
the obligations to the elderly, the retirees or does it change
the size of the economy? Other questions are less important.
Chairman Nussle. One final thing that I just thought of
that I am interested in your--I think I know the answer, but, I
expressed, and you were here, which I appreciate, when David
Walker was here, about the fact that there is a lot of focus on
solvency, and that seems to be the primary focus on the part of
many Members, but more especially the media which is getting
this message then therefore out to the public.
Is that a proper focus? And if there are other focuses that
we should have as far as just general guideposts, what should
they be? Let's start with that.
Mr. Crippen. I would suggest that it is not the proper
focus. In fact, in some venues, I have argued that it is
distracting. Indeed, I and others have perpetuated that as a
policy objective for a long time. I was involved in the 1983
Commission, as I think you know. Howard Baker, who I worked for
in the other body, as you say, actually proposed the
Commission. He sold it to President Reagan, and we made the
first call to Alan Greenspan to see if he would Chair it. So we
were very much a part of that.
And the only question we asked of the Commission for any
proposals was, does this ensure 75-year actuarial or long-run
solvency? We didn't ask other questions about its effect on the
economy, we didn't think about that. We didn't ask what the
trust fund build-ups were going to be invested in.
We thought only of solvency as the primary objective,
because the fund was almost insolvent. I think we convinced
ourselves and our constituents of the same thing--that solvency
was a very important issue. But since then, at least I have
come to understand better that the implications for my children
are not so much what is in the trust funds, but clearly what
they are able to pay for at that time.
And the difference really is one of consumption. You and I
can save in individual accounts of our own or of somebody
else's construction, but to do so we have to give up spending,
we have to give up consumption, and hope that that helps
capital investment and the economy grow. It is not necessarily
true, however, that in generating trust fund surpluses the
government has collectively given up consumption. And so unless
we actually do something to help the economy, my share of
Microsoft, which I will have to sell to my kids, will be worth
more or less depending on how the economy performs largely.
And their ability to buy it from me will depend on how much
they can make out of the economy. So whether the assets are so-
called real in equities or whether the assets are in government
bonds matters much, much less than how gib is the economy at
the time.
Chairman Nussle. Again, thank you for your testimony. I
would like to thank, again, Mr. Spratt for the atmosphere in
which this hearing was held. We all, I think, came to this with
an interest in trying to solve the problem, understood the
problem, and start looking at some solutions. If we would start
learning from that experience, Congress may be able to function
in dealing with this in a much better way.
I would also like to thank Tori Gorman. This has been a
good hearing. It takes a lot of staff work on both sides to get
this all put together. Our witnesses have done a great job and
the members participated in a very constructive way, and I
appreciate that.
So with that we are adjourned.
[Whereupon, at 1:19 p.m., the committee was adjourned.]
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